What to Know Before Executing a Commercial Sublease Agreement

Signing a commercial lease is an exciting time for any company, whether moving into a newly renovated office space or expanding from a small warehouse to a single-tenant industrial building. It signifies a commitment, indicating steady business and a bright future. Unfortunately, some things do not always go according to plan, and businesses are often forced to make difficult real estate decisions on the fly.

In these situations, an attractive option for commercial landlords and tenants alike is a sublease. Subleases are fairly common, but there are rules and constructs that commercial landlords and tenants should be well aware of in order to best utilize a sublease to their advantage.

What is a Sublease Agreement?

A sublease is a separate contract between the original tenant (“sublessor”) and a third-party tenant (“sublessee”). The sublessor transfers a portion – but not all – of its rights and interests in the lease to the sublessee (i.e., a fraction of the remaining term or a portion of the leased premises). The sublessor remains responsible to the landlord for the property and its condition – the original lease is still in effect, and both the landlord and sublessor can enforce the lease against the other.[1]

Contrast this with an assignment, a separate contract between the original tenant (“assignor”) and a third-party tenant (“assignee”), where the tenant transfers all of its remaining interests in the lease to a third party. This typically results in the assignor being relieved of its obligations to the landlord once the assignment is executed.[2]

Commercial leases often mention subleases and assignments in the same clause, but they are not interchangeable, and parties should be informed as to the legal effects of each.

Must a Landlord Approve a Sublease Agreement?

In general, the law and public policy favor the transferability of real property.[3] If a lease is silent as to whether or not subleasing is allowed, the right to sublease may usually be assumed.[4] However, most commercial leases state that subleasing is permissible, subject to express written landlord consent. This benefits landlords and tenants in separate ways.

On one hand, this consent typically hinges on a vetting process similar to what took place during the negotiation of the lease itself, during which a landlord is entitled to review the sublessee’s financial backing, approve its use, and otherwise vet its background and standing. On the other, landlord consent is often subject to a reasonableness standard, with lease language such as: “Landlord approval of sublease not to be unreasonably withheld.”

If the sublessee operates a business conforming to lawful use regulations, has sufficient financials, and does not otherwise pose any “red flags,” a landlord must likely approve the sublease. However, the aforementioned reasonableness standard is a question of fact, and the tenant will ultimately have the burden of proof on that issue.[5]

Can I Charge My Sublessee More Than I Pay My Landlord?

If not expressly addressed in the lease or sublease, there is no limitation on the rent a commercial sublessor is able to charge their sublessee. More often than not, this deal point comes down to supply and demand in the market. For example, if the sublessor signed a long-term lease several years ago at a low rate, it is possible that the market has picked up during the lease term and the sublessor’s premises is now worth more than what it is paying in rent. This may result in a monthly profit, depending on what market conditions allow the sublessor to charge its sublessee.

Fortunately, experienced landlords will usually address this issue preemptively. In California, the parties may expressly agree to the landlord’s right to any amount of profit derived from the tenant’s sublease agreement with its sublessor.[6]

Contact a Real Estate Attorney Today

All lease transactions have their own details, nuances, and challenges. Whether a national landlord, single-office tenant, or somewhere in between, it is important to speak to an experienced real estate attorney to review your lease, inform you of your rights, and limit the risk of litigation down the line. Our experienced team at Zacks & Freedman, PC is here to help. Contact us today to request a consultation.

Neither this website nor this post are intended to create an attorney-client relationship.

[1] Boston Properties v. Pirelli Tire Corp. (1982) 134 Cal.App.3d 985, 992

[2] Though this is typical, it is not always the case. Contractual language can vary widely, and any party entering into a sublease or assignment should consult a real estate attorney to ascertain their rights and obligations in either scenario – whether a party to the original lease or a third-party receiving the leasehold interest.

[3] California Civil Code § 711

[4] California Civil Code §§ 1044, 1995.210(b)

[5] California Civil Code § 1995.260

[6] Kendall v. Ernest Pestana, Inc. (1985) 40 Cal. 3d 488, 499.