Subleasing: The Good, the Bad, and the Manageable
June 29, 2017
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Everything You Should Know About Subleasing
If you are not already familiar with subleasing, now is the time to dig deeper, before your new lease term starts.
Subleasing occurs when your lease-signing tenant rents out their spot in your property to another “subtenant” for a certain period of the lease term. You will hear the word, “sublease” tossed around on college campuses more than anywhere else. This is due to the mobility of students throughout the year: beginning internships, studying abroad, living at home during the summer, etc. It’s a good idea to firmly establish your position on subleasing before you have a tenant sign the lease.
A quick note on terminology: The terms “subleasing” and “subletting” are often used interchangeably, but they actually have slightly different meanings. “Subleasing” occurs when a tenant forms an agreement with a subtenant independently of the original lease. The original tenant is still responsible for the original lease. “Subletting” (or “reletting”) is when your tenant finds a replacement tenant who takes over their current lease with you. With your approval, the original tenant is released from all obligations of the original lease.
In this article, we focus specifically on subleasing—when your original tenant remains subject to the original lease as an intermediary.
Subleasing is an easy way to ensure your property stays occupied throughout the year. It becomes the tenant’s responsibility to find someone to essentially “take over” the lease for that period. If your lease includes a subleasing agreement, it is going to be more marketable to tenants, particularly in areas where subleasing is more common. Having the flexibility to pursue an opportunity away from home, if it arises, makes the tenant more comfortable with signing a lease.
And while it’s no direct concern of yours, subleasing could help your tenant make an extra buck, too. Remember, regardless of who occupies the property (subtenant or other) the original, leased tenant is still responsible for making sure the full amount of rent gets to you. If your leased tenant negotiates a price that is above your asking rent, then the tenant will be able to make a little money while subleasing. However, make sure this doesn’t get out of hand — If your original tenant is going to profit off of the subleasing agreement, it’s recommended that you require the tenant to share their profits with you in the original rental agreement.
On the flip side, if the tenant is in a crunch and must offer their spot below your asking rent, then they still have to cover the difference. The benefit for you is that no matter what, you are getting the full rent amount.
Additionally, a vacant property is a large target for criminals. If you have a tenant who will not be living in the property for long periods of time, then you should actually encourage some form of subleasing to help protect your property. If you allow subleasing, someone is more likely to always be in the property, which helps deter targeted crime.
When subleasing, your tenant essentially becomes the landlord. However, they still owe you all of the responsibilities they did when they signed the lease. That means that if something goes wrong or if maintenance is needed on the property, the subtenant must report to the tenant who will then bring it to you. This added step in communication can slow down the process and should be accounted for.
Often, your personal touch is not going to be the same with a subtenant as it would be with the original lease-signing tenant. If your lease agreement is vague or too broad on subleasing, you may give the lease-signing tenant too much control over the process. This is a mistake. In this case, if the subtenant does anything on or to the property that needs legal attention, it is going to be much more difficult to prove fault than it would be with a lease-signing tenant. It is therefore crucial to account for any and all possibilities in the original lease.
After considering all factors that play into subleasing, if you decide to allow subletting, you are going to want to make sure you work this into your lease agreement. The things you will want to state in your lease are:
- How rent will be collected
- Who will be responsible if the property is damaged during the subleasing period
- Your involvement in approving a subtenant
The easiest way to manage all of these leasing processes is (shameless plug), property management software. Features like online leases and online payments simplify the entire process. The way we’ve structured the Innago system makes it painless to add and manage a subtenant while maintaining communication and involvement with the original tenant. This gives you direct contact to make sure the subtenant is taking care of their portion of rent. The original lease-signing tenant will still be notified when rent is collected or, more importantly, overdue. They become the first line of defense in making sure the payment is made and can even submit payment themselves if necessary. At the end of the day, using a platform like Innago makes it easy to keep your tenants responsible.
Subleasing can add value in more ways than one, but it is essential to have a strong understanding of the risks inherent to the process, and to establish clear rules and responsibilities for when subleasing does occur.
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