What is a Commercial Sublease Agreement?

October 22, 2021

Subleases are a fairly well-known concept in residential real estate, but commercial sublease agreements are far more complex. From understanding the key technicalities of a commercial sublease agreement to negotiating ideal terms, the process can quickly become overwhelming.

We’ve created a short and simple guide to commercial sublease agreements, making it easier to understand exactly what they are, how commercial subleasing works, and whether it may be right for you.

What is a Commercial Sublease Agreement?

A commercial sublease is a leasing agreement involving three parties:

  • The tenant leasing a property
  • A new tenant searching for commercial space for lease
  • The property owner

Through a commercial sublease agreement, you (as the original tenant) become the sublessor/sublandlord leasing the property to a new tenant (the sublessee/subtenant). The subtenant will occupy the space (or a portion of it) for the remainder of your lease, or whatever period of time is specified in the agreement.

The property owner still remains the primary landlord, and you are generally still the party responsible for the full lease payments. As the sublandlord, you collect rent from the subtenant, which you may or may not put towards the monthly rent you owe.

What You Need to Know to Sublease a Commercial Property

Before you can decide to enter a commercial sublease agreement with a prospective tenant, you must first review your own lease very carefully. While most landlords allow subleasing, there are some situations in which you will encounter restrictions.

It is important that you are well-prepared before any conversations with your landlord, especially because many legal technicalities and potential repercussions are involved. Here are a few vital points to understand before moving forward.

Sublease rights

Ideally, your sublease rights will have been something you covered when negotiating your lease terms. But even if you were not aware of the possibility of subleasing at that time, your lease may already outline basic terms for sublease rights.

Read your lease closely before approaching your landlord, and look for some of the many factors that can impact your ability to sublease:

  • The right to market to all tenants gives you the legal freedom to market and offer your space to be subleased to any tenant. Obviously, this is a useful advantage, increasing the odds of finding a subtenant suited to your ideal terms. It’s not unusual for landlords to place certain limitations on this provision; however, you may not have the option to market to any potential tenants, depending on your lease terms.
  • Landlord consent and recapture rights are designed to protect the landlord’s interests, requiring a tenant to obtain consent before subleasing a space (which is standard practice). Recapture rights are a legal provision that permits a landlord to take back the entirety of a space in the event that a tenant requests consent for subleasing. The terms may state that the recapture right is only applicable if a tenant wants to sublease an entire space for the remainder of the lease term. In that scenario, subleasing a portion of the space could still be viable.
  • The right to retain profits ensures that you are able to keep a portion of the profits earned via subleasing a space. Oftentimes, when the market has appreciated from the origination of the lease, you may be able to sublease at a higher rent than you are currently paying. After subleasing costs, there may be profits for you to pocket – but it all comes down to what your lease says. In most cases, the standard practice is for the landlord to request one-half of any profits made by subleasing.

Sublease negotiating, pricing, positioning, and marketing

Once you’ve established that a commercial sublease is permitted according to your lease terms, you can move into the next stage.

Generally, the best route is to hire a professional broker to assist you throughout the remainder of the subleasing process. An experienced broker will be a necessary resource for:

  • Negotiating with your landlord and potential subtenants
  • Pinpointing the best sublease rate for your specific space
  • Ensuring the space is competitively positioned
  • Marketing the space properly
  • Protecting you from any financial or legal risks

Is a Sublease Agreement Right for You?

Although subleasing might not be the perfect match for everyone, there are several situations in which it can be a great option for tenants.

1. You want to downsize your office space.

If you have space you aren’t using, but your lease has not concluded, subleasing can be ideal. You can either sublease a portion of the office space, or the office in its entirety.

Some tenants that need to downsize opt to sublease a part of the space, so they can still occupy the remaining portion. As result, they can avoid the expense and hassle of relocating completely. Particularly if you are leasing a multi-level or multi-office property, subleasing can be an easy next step. For tenants that no longer need any office space, or prefer to relocate completely, subleasing the entire property could be the best choice. In general, this is the most common of all commercial subleasing options.

2. Right now, you have more space than you really need – but that could change.

It’s not unusual for high-growth companies to sign leases for spaces larger than they need, with plans to eventually utilize all of the space down the line. But in the meantime, subleasing can help you save money while still preserving the flexibility for growth.

Depending on your growth projections, you can seek a short-term subtenant that aligns with your planned timelines. Once the commercial sublease is up, the full space is yours and ready to use.

3. You’ve outgrown the space you’re in now.

Growing rapidly is a good thing, but it can come with complications, including what to do if you’ve outgrown a space, but your lease has not yet expired. Instead of splitting your team between two spaces, you can sublease the original office space and move on to a new, larger property.

4. Your company is shutting down or relocating.

In the event that you need to unexpectedly relocate your business or your business shuts its doors altogether, terminating an active lease can be a major concern. In many cases, you will be unable to terminate the lease; if you are able to, it will involve paying an expensive termination penalty. But if you can sublease the space, you can avoid the hassle and expense entirely – and hopefully, recoup as much of the monthly rent cost as possible.

Let Unique Properties Help You Navigate Commercial Subleases in Denver

As a leader in commercial property leasing in Denver, the Unique Properties team has worked with a broad range of clients to navigate commercial sublease agreements, traditional leases, lease restructuring, and more. We firmly believe that every client should have everything they need to make a confident, informed decision – and that starts with a trusted, knowledgeable real estate team.

Whether or not commercial subleasing is an ideal option for you, Unique Properties is here to help you make the right move. Since 2005, we’ve earned industry recognition as the best commercial leasing firm and an outstanding example of client service and proven success.

Learn more about your options for commercial subleasing when you contact our Denver commercial real estate team today.


Image Source: MDV Edwards / Shutterstock

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