Seize a Competitive Advantage – Or Don't Compete!

Sublease Definition – How Does Subleasing Work?

What Is a Sublease?

SubleaseA sublease is the renting of property by a tenant to a third party for a portion of the tenant’s existing lease contract.

A sublet, or sublease agreement, adds someone new to an existing lease. Usually, the new person (subletter) replaces someone who is moving out (sublessor or sublessee).  But, it can also happen with any new person being added to a lease. A sublease is a binding contract, and all of the same lease rules and rental laws apply to everyone involved as with a regular lease.

How a Sublease Works

A lease is a contract between a property owner and a tenant.  It transfers the owner’s rights to the exclusive possession and use of the real estate property to the tenant for an agreed-upon period. The lease states the length of time the contract is to run and the amount of the tenant’s rent. In legal terms, the tenant’s legal right to possess the property is deemed tenancy. Subleasing occurs when the tenant transfers a part of their legal tenancy to a third-party as a new tenant.

(Source: investopedia.com)

Types of Sublease

There are two types of a sublease.

  • Short-Term Sublease – The tenant plans to return to the rental after a brief, temporary absence.  Maybe, after an overseas work assignment or a family medical issue. The new subtenant subleases the property for however long is necessary.
  • Permanent SubleaseThe tenant is moving away permanently and finds a renter to sublease the unit for the lease’s remainder. If the subtenant acts as the new primary tenant, this is known as an “assigned lease”.  An assignment may not be done without the landlord’s consent.

Sublease: Pros for Landlords

  • No vacancy. A tenant moving away from the rental mid-lease may break their lease, if you don’t allow an apartment sublet. Allowing a sublease means possibly avoiding a rental vacancy and lost rental income.
  • Tenant finds the subletter. With a sublease, the original renter is responsible for finding someone to take over the original lease. The landlord doesn’t have to deal with the time and hassle of finding a tenant.
  • The tenant is possibly responsible for the subtenant. The original tenant isn’t the one currently living in the rental, but they signed the actual lease agreement. So, depending on the subleasing agreement, they may be responsible if the subtenant stops paying rent, damages the property, or otherwise causes issues at the rental. This could mean less work for you as the landlord.

Sublease: Cons for Landlords

  • Inconsistent screening procedures. If you don’t require that all subtenants must be screened by the landlord, you’ll have no idea about the caliber of tenant subleasing your property. The original tenant may find someone to cover the rent, and less concerned with a subtenant’s qualifications.
  • The subtenant may not be reliable. If the original tenant is responsible for the subtenant, tracking down the original tenant for late rent payments may be difficult. It’s risky to rely on the original tenant to relay complaints or repairs.
  • Property damage. As a short-term renter, a subtenant may cause rental damage because they may be unaware of the rules.
  • Lease violations or eviction. The subtenant could violate the original lease in other ways, such as creating too much noise or by having a pet when you have a no-pet policy. Nonpayment or other lease violations may result in subtenant and original tenant eviction. As well, in some states or cities, your original tenant can evict the subtenant.

(Source: thebalancesmb.com)

Who is Involved in a Sublease? 

These are the three main parties involved in a sublet or sublease agreement:

  • Landlord / Lessor – This is the property owner who offered the original lease agreement to the tenant and who that tenant pays rent each month.
  • Sublessor / Lessee / Tenant – This is the original tenant renting the property who has an established lease agreement with the landlord. In relation to the landlord, this party is the lessee. In relation to a subtenant, this party is the sublessor.
  • Subtenant – This party is the new tenant renting the property from the original lessee or tenant of the property.

Subleasing and State Laws

The laws of many states and local municipalities affect a tenant’s right to sublease. These laws may allow an individual to sublease even if their contract with the landlord forbids it. For example, in New York City, a tenant who lives in a building with four or more units may sublease regardless of any statement to the contrary on the lease agreement. In San Francisco, a tenant can replace a roommate with another as long as the replacement meets the landlord’s application screening standards. For example, a landlord might demand a certain credit score where a tenant is concerned. Subleases can apply to both residential and commercial properties.

(Source: investopedia.com)

Example of a Sublease

A lease is generally for a predefined term.  However, situations can arise that make it difficult or impossible for the original tenant to complete the lease term. For example, if a tenant is renting an apartment in Chicago with a 12-month lease and in month four that tenant receives a job offer in Boston.  Then, the tenant may decide to sublease the apartment to another tenant for the remaining eight months. In this case, the sublease means that the original tenant can accept the job and move.  As a result, he does not have to pay expensive fees to get out of the lease or pay rent on two apartments. The landlord also benefits because they receive all 12 rent payments and are saved the expense and effort of finding a replacement tenant.

The sublease arrangement also means that the original tenant retains an interest in the apartment. Thus, if the original tenant decides to move back to Chicago, they may be able to renew their lease on their old apartment.

(Source: ibid)

Final Words

If you’re a landlord leasing a rental to a tenant, it’s important to be crystal clear about what you do and do not allow in the lease.  This includes whether or not your tenant can sublease the apartment.  But, subleasing has pros and cons for both tenants and landlords. Through a clear lease agreement, you may be able to have your tenant sublease the space in a way that you’re comfortable with. As a result, it may also ensure that rent is paid every month and that your rental unit is never empty.

Up Next: Day Trading For Beginners – What Is A Day Trader

Day trading is simply buying a stock or security, then, quickly selling or closing out the position.  Usually, the position is closed within a single trading day.  Ideally, a day trader wants to “cash-out” by the end of each trading day.  They want no open positions to avoid the risk of losses by holding security overnight.  Day trading is not for everyone and carries significant risks. It requires an in-depth understanding of how the markets work and various strategies for profiting in the short term.  Short term profits require a very different approach compared to traditional long term, buy and hold investment strategies.

Leave a comment

Your email address will not be published.