Sublease

What is a Sublease?

A sublease is a lease between the original lessee of a property to another third party. A sublease arrangement makes the original property tenant now a landlord of sorts. In such arrangements, the lessee is still responsible to the landlord for all the rent and lease payments. However, the third party leasing the property from the lessee (subletter) is now also responsible, generally through a legal agreement of their own.

Subleasing arrangements are common in university and college towns, as well as many new types of shared office spaces and vacation rentals. Many laws govern the agreement throughout the United States, and it is important to check federal, state, and local laws before entering into such an agreement from either side.

Subleases: How Do They Work?

Once a legally binding sublease has been created between two parties (generally in the form of a contract), the new tenant generally takes possession of the property they are now subleasing. The new subtenant now pays the lessee directly, or in some instances, they may directly pay the landowner/landlord.

In general, written contracts are encouraged with such arrangements as it is often difficult to enforce verbal contracts. The flow of funds in a sublease agreement generally conforms to the below:

Subleases in Practice: Where Are They Found?

Subleases are found throughout the rental industry. University and college programs are generally only eight months out of the year (two semesters). However, students are often required to sign year-long lease agreements to procure off-campus or sometimes on-campus housing.

Many landlords are hesitant to sign leases that are only eight months at a time, and thus students often find themselves compelled to sign full-year leases while many of them are not present for the summer semester.

In such instances, lessees can find a third party (perhaps a student attending the summer semester) to sublet for a four-month period. It can help the lessee avoid any costs in keeping a vacant apartment should they decide to go home for the summer to cut down on living expenses.

Subleasing can also be found in another newer facet of lease agreements like the shared office spaces of WeWork and other shared space commercial real estate companies. Similar companies will lease out entire commercial floors of skyscrapers in central business districts of major cities. They will then enter into flexible subleasing arrangements with companies or individuals to rent areas as small as a desk or as large as an entire section of offices.

Such types of subleasing agreements give flexibility to start-ups that wish to grow into their commercial leasing needs, as well as individuals who wish to start with a company address but are not in a place to rent out an entire floor quite yet.

Subleases and Fraud

Unfortunately, subleasing can also be mired in different types of fraud. Some individuals can use subleasing arrangements to engage in predatory leasing practices that may take advantage of individuals that perhaps do not qualify as a lessee because of bad credit or other circumstances.

For example, in the United States, it is generally illegal to sublease social housing. It can create instances where individuals unethically attempt to try and profit off taxpayer-funded residences, and, as such, social housing is often tightly regulated. It is also often illegal to sublease a residence for more than the original lease. It is done to prevent predatory leasing and the possible hoarding of rental properties.

Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Prepaid Lease
• Month-to-Month Tenancy
• Minimum Lease Payment
• Net Lease
• See all commercial real estate resources