A sublease is an agreement where an original tenant leases a rental property to a new subtenant for a set period of time.
Subleasing is popular in real estate, as it benefits both landlords and renters. Every real estate professional should understand how subleasing works for rental properties. Of course, you’ll need to learn about this topic from trusted real estate connoisseurs. That’s why we’re here to share the crucial details of how subleases operate in the rental market.
In this post, we’ll define subleasing, give examples of its use, and explain its benefits and drawbacks. Keep reading for a full breakdown of this important term!
What Is Subleasing?
A sublease is a rental agreement where a current tenant leases property to a new tenant for a portion of the initial lease term.
In a sublease, the new tenant makes payments to the first tenant while the first tenant continues paying rent to the landlord. The new tenant may be renting the entire apartment or just one room.
Regardless, the first tenant is still responsible for fulfilling all their initial lease terms. For example, if the new renter falls behind on rent payments, the original tenant is responsible for overdue rent and late fees.
Before a tenant can initiate a sublease, they must ensure that their lease agreement permits it. In most cases, the tenant must notify the owner before agreeing to sublease the rental property.
What Is a Sublessor vs. Sublessee?
In a sublease agreement, the sublessor is the first tenant who pays rent to the landlord. The sublessee is the new tenant who pays rent to the sublessor.
Examples of Subleasing in Real Estate
Say that a tenant named Abdul has been renting an apartment for two months. He loves his new place, but it has an extra room that he never uses.
Abdul checks the terms of his lease agreement and realizes he can initiate a sublease. He decides to ask his friend, Ezra, if he would like to rent the extra room. Ezra agrees and signs a new lease with Abdul, granting him tenancy of the room in exchange for monthly rent payments.
Abdul collects rent from Ezra while paying his landlord the initial agreed-upon rent. In this scenario, Abdul makes extra money while Ezra gets a place to live without paying for a whole apartment.
Let’s look at one more scenario where subleasing might be a beneficial option.
Say that Katie signed a lease agreement with a landlord three months ago. The lease expires in nine months, but Katie was just offered a job in a new city. She would like to move but cannot break her lease or afford to pay for two.
To solve the problem, Katie decides to make a sublease agreement with a new tenant. She already checked the terms of the master lease and received the landlord’s consent.
Her friend, Brian, agrees to sublease the apartment and pay rent to Katie. Because Katie is desperate to move, she decides to charge Brian rent at a slightly lower price than what she pays.
Katie moves to a new city and collects rent payments from Brian every month. She also continues making the monthly rental payments that are outlined in her lease with the landlord.
This is another example of how subleasing works in real estate. In this case, the landlord, sublessor, and sublessee each benefit from the rental agreement.
Pros and Cons of Subleasing
There are a few pros and cons of subleasing that tenants and property owners should know before signing a contract.
Subleasing benefits tenants who have extra room in their rental properties and want to make a little extra cash. With a sublease, the original lessee can rent a room in their space to a new tenant and collect rent from them. Subleasing also benefits tenants who wish to end their tenancy but cannot break their lease. A sublease enables tenants to continue paying rent on their initial lease while starting a new one.
The downside to subleasing is that tenants are still responsible for fulfilling the terms of the original written lease. If the sublessee fails to pay rent on time or damages the property, the sublessor is held responsible and must deal with the landlord directly.
A sublease benefits sublessees because it is more flexible than a standard lease. For example, when screening rental applicants, sublessors are often less picky than landlords. This means a new tenant can have a lower credit score and still get approved.
Another advantage is that sublessees often do not have to pay rent at full price. If the sublessor is motivated enough, they will charge less for rent and other costs. One final benefit of subleasing for subtenants is that they do not have to lock themselves into a full one-year lease.
A disadvantage of subleasing for new tenants is that the sublessor may not be honest about the original lease terms. This could deceive new renters into paying higher rent and extra costs. For this reason, a sublessee should always communicate with the property owner to understand the original contract. For example, a sublessee should not be paying utility bills if the original contract does not call for this expense.
The benefit of subleasing for landlords is that their tenant still fulfills the terms of their lease. The landlord continues receiving rent payments, and the property is not left vacant. Another advantage is that the new subtenant may sign a separate lease with the landlord once the first lease ends. This means the landlord may not have to find someone new to rent the property at the end of the first contract.
The con of subleasing is that landlords have less control over the property because they do not have a lease with the subtenant. The subtenant may also be less likely to meet the landlord’s standards since they did not personally select them. Another issue is that the landlord is forced to rely on the original tenant to ensure the new renter abides by the lease terms.
Here’s a table that breaks down the pros and cons of subleasing in one clear visual:
|Pros of Subleasing
|Cons of Subleasing
What to Include in a Sublease Agreement
In a sublease, the sublessor is responsible for creating a new lease contract. Sublessors must include the terms of their original lease agreement and any new clauses.
According to Adobe, a sublease agreement should cover the following information:
- Name and contact details of the sublessor and sublessee
- Property address and description
- The term of the sublease
- Rent amount and payment schedule
- Security deposits and fees
- Included features (utilities, furniture, etc.)
- Restricted activities
- Consent from the landlord
How to Negotiate a Sublease
In a sublease, each party should negotiate the terms to ensure they get the best deal possible. It is especially important for subtenants to negotiate, as rent prices in a sublease can typically be talked down.
Here are some tips on how you can negotiate a sublease:
- Bring all legal documents while negotiating, including credit score, payment records, and references
- Determine the average rental price for housing in the area to ensure you are not taken advantage of
- Know what you would like to negotiate for (reduced utility costs, free parking, security deposit terms, garage space, etc.)
- Be willing to compromise on some terms
Is Subleasing Legal?
Subleasing a rental property is legal in most cases. However, a tenant should always check their contract to ensure that subleasing is permitted. If the contract prohibits subleasing, then the sublessor must know their rights before seeking a new prospective tenant.
For example, a tenant renting a property in New York City in a building with four or more units can legally sublease their apartment regardless of the original lease terms. Before initiating a sublease agreement, the tenant must ensure they follow all state laws.
Frequently Asked Questions
Let’s answer some questions real estate students frequently have about how subleasing agreements work.
What Is the Difference Between Leasing and Subleasing?
In a standard lease, the landlord sets terms regarding payments and the length of the agreement. The tenant makes rental payments for the entire term until the contract is up. In exchange, they can live in the rental unit.
A sublease is more complicated, as it requires that the tenant creates a new lease with a new renter for a portion of the term. In a sublease, the original tenant can either rent out a portion of the apartment and continue living there or move to a new place altogether.
Is a Sublease Legally Binding?
A sublease is a legally binding contract between the original renter and the new renter. Both parties must fulfill the terms agreed upon in the sublease. It’s also important to note that the new renter has the same legal rights as the original renter in a sublease.
What Is the Difference Between Subletting and Subleasing?
Many people use the terms “sublet” and “sublease” interchangeably, but they do not have the same meaning.
Subletting is when the original tenant finds a renter to sign a new lease with the property owner. In a sublet agreement, the new renter deals with the landlord directly.
This lease agreement differs from a sublease, where the original tenant becomes the landlord to the new renter.
What to Know Before the Real Estate Exam
A sublease is an agreement where a tenant leases a rental unit to a new subtenant for a portion of the lease term.
Subleasing allows tenants to rent out a portion of their rental unit or move away without breaking their lease. Before taking the real estate exam, real estate students must understand how subleases work.
But this isn’t the only concept you’ll need to learn before the big day. Study even more crucial terms using our online Real Estate Flashcards today!