A commercial sublease is when a tenant rents all or part of its leased premises to another business, while staying responsible to the landlord under the original lease. At Tenant CS, we sit on the tenant's side of these deals, and we see subleasing work best as a short-term way to cut the cost of space you don't need - not as a way out of your lease.

Get it right and a sublease turns empty desks into cash flow, or lands you a fitted-out space at a discount. Get it wrong and you can end up paying for the same space twice. Here's how the process works, what it really costs and where the risks sit for both sides.

What is a commercial sublease?

A commercial sublease is a stand-alone agreement between a tenant who already holds a lease to a commercial property (the sublessor) and another party who wants to occupy part or all of that property (the sublessee).

Say your business leases a whole floor on a five-year lease, and after a restructure you only need half of it. You keep your lease with the landlord (the head lease) and sign a separate sublease with another business for the other half. They pay rent to you, you keep paying rent to the landlord, and the landlord still looks to you if anything goes wrong.

New to terms like head lease, sublessor or bank guarantee? Our commercial real estate terminology guide explains them in plain English.

Sublease vs assignment vs surrender

Subleasing is one of three common ways to offload space you no longer need:

• Sublease: you keep your lease and stay liable for it; the subtenant occupies under you. Suits a temporary saving, or space you might want back later.
• Assignment: you transfer the lease to a new tenant, who takes over the obligations. This can provide an exit, although you should confirm whether you're released from future liability.
• Surrender: you and the landlord agree to end the lease early, usually with a payment from you. Suits an exit when neither of the above is workable.

For a closer look at the first two, read our guide to assignment vs subleasing, and why you should negotiate the right to do both.

How does subleasing work?

Whether you're the sublessor or the sublessee, it helps to know the steps. Here's how a typical commercial sublease comes together.

1. Check your head lease

Your right to sublease comes down to your lease. Most commercial leases allow subleasing with the landlord's written consent, some prohibit it outright, and others restrict who you can sublease to (for example, companies already in the building or businesses in the same industry as existing tenants). Don't assume you have an automatic right - read the clause before you advertise anything.

2. Run the numbers

Subleases almost always rent at a discount to direct leases. Sublessees know subleases are among the best-value deals around, so your space needs to be commercially attractive from day one.

Sublease rental recovery varies considerably depending on market conditions, location, remaining lease term and the quality of the space. For financial planning, it's sensible to model conservative recovery scenarios rather than assume you'll recover your full rental commitment. There's a worked example further down.

3. Find the right subtenant

Finding a subtenant can take a long time. You're competing with landlords who have bigger budgets, more market data and dedicated leasing teams, so be honest about what makes your space the better option.

A few things make or break the search:

• Term fit - a sublease runs for what's left of your own lease at most, so your subtenant needs to want a term that fits the time you have left.
• Financial strength - you become their landlord, so you need to be comfortable they can pay rent and meet their obligations.
• Space suitability - subleases are often plug-and-play, with existing fit-out, furniture and layout. That suits some businesses and rules others out.
• The right agent - you need someone genuinely working for your outcome (see the tip below).

Tenant tip: Ask any agent marketing your sublease whether they also lease competing space for landlords in the same building or precinct. If they do, ask how they'll handle an enquiry that suits both. You don't want your well-priced space to be the bait that brings enquiries in before they're steered to landlord stock.

4. If consent is needed, start early

Where your lease requires landlord consent, expect to provide details of the subtenant's business and their financials. Start the process early, because it can be slow. You'll usually also cover the landlord's costs, such as legal fees and sometimes property management or admin fees, so factor these into your numbers.

5. Document the sublease

A sublease can't run past your head lease. The term is usually whatever is left of your lease when you go to market, ending on or before your own expiry date. Beyond the term, agree in writing:

• the rent, and whether it's net or gross (our guide to net, gross, face and effective rent explains the difference)
• who pays which outgoings
• the security the subtenant provides you, such as a bank guarantee
• who is responsible for make good on the subleased area
• access to shared areas, services and equipment

Have the documents prepared properly and get your own legal advice before you sign.

6. Manage it - you're now the landlord

Once the subtenant moves in, you're effectively their landlord. You collect their rent, pass their maintenance requests on to your own landlord and keep in touch for the rest of the term. Meanwhile, your own lease obligations carry on exactly as before.

What does a sublease actually cost a sublessor?

Here's a simple hypothetical example. The figures, including the recovery rate, are assumptions to show the maths, not market benchmarks.

Your business leases 600 sqm at $650/sqm gross, or $390,000 a year. You have three years left on the lease and only need 400 sqm, so you decide to sublease the other 200 sqm.

• The surplus 200 sqm costs you $130,000 a year ($650/sqm gross x 200 sqm), or $390,000 over three years.
• Assuming, for this example only, that the sublease achieves 50% of your rent, it brings in $65,000 a year, or $195,000 over three years.
• That leaves a shortfall of $195,000 over three years, before additional costs.
• Add one-off costs such as landlord consent and legal fees, agent fees and any works needed to separate the space.

Recovering $195,000 over three years is still considerably better than receiving nothing for the surplus space. However, the costs of securing and managing the sublease need to be factored into the overall saving.

The pros of commercial subleasing

For sublessees

• Lower rent - subleases are almost always priced below comparable direct leases.
• Fitted-out space - many subleases come with fit-out and furniture already in place, saving upfront cost and getting you in faster. Whether you're liable for make good at the end comes down to negotiation.
• Flexibility - shorter terms suit businesses that are growing fast, testing a new location or unsure of their future space needs.
• Shared amenities - you may be able to share meeting rooms, kitchens, internet and office equipment, sometimes at reduced cost or even free.
• Predictable costs - many subleases are offered on an all-in gross basis, with fewer surprise outgoings. You'll still be responsible for any damage you cause.
• Networking - sharing space with a complementary, non-competing business can open up referrals and new ideas.

For sublessors

• Cash flow - recover part of the rent on space you're paying for anyway.
• Right-sizing without relocating - shrink your footprint without the cost and disruption of a move.
• A bridge to an exit - a short-term subtenant can sometimes become the party you later assign the lease to.

Cons and risks for sublessees

1. Sublessor default

This is the biggest risk. If your sublessor breaches their head lease (for example, by not paying rent), the landlord may be able to end it, and you could lose access to the premises. Protect yourself by making sure:

• your sublease includes the right to recover costs and damages
• you understand what happens if the sublessor defaults
• the rent you pay is actually reaching the landlord
• a tenant rep or lawyer reviews the deal before you sign

Tenant tip: Before you sign a sublease, ask to see the head lease and the landlord's written consent. Be wary of any sublessor who won't show you either.

2. Inherited terms

If the sublessor negotiated poor terms with their landlord, they may try to pass them on to you. Compare the deal against other options on the market rather than taking it at face value.

3. Less room to customise

You're often moving into someone else's fit-out, and sometimes sharing the space, so there's less scope to tailor it to your brand. If you have specific requirements, a direct lease may suit you better.

4. Maintenance delays

Repair requests usually go through the sublessor to the landlord, and that extra step can slow things down.

Cons and risks for sublessors

1. You stay liable

Some tenants treat subleasing as a get-out-of-jail-free card. It isn't. You remain responsible for your head lease, even if your subtenant stops paying or damages the premises. That usually includes your bank guarantee and your make-good obligations at the end of the lease.

2. Relying on sublease income

If you need the sublease income to meet your own rent, the arrangement becomes risky. If the subtenant leaves or defaults, you're left to foot the whole bill.

3. Finding, and keeping, a subtenant

Your lease may limit who you can sublease to. It may also require landlord consent, and the approval process can take time. Every month the space sits empty is another month of full rent.

4. You won't recover all your costs

You'll rarely recover your full rent, and consent, agent and works costs eat into what you do recover. And if things go wrong under your head lease while a subtenant is in place, you may end up with obligations to both your landlord and your subtenant.

Subleasing isn't your only exit strategy

Subleasing is a band-aid, not a cure. It works best:

• as a partial or temporary saving
• when your landlord won't consent to an assignment
• when your lease has onerous clauses a new tenant is unlikely to accept

If you want out entirely, compare it with assigning the lease, negotiating a surrender or the other options in our guide to ways to break a commercial lease. And if your lease ends within the next year or so, it may make more sense to plan for your lease expiry than to sublease at all.

How Tenant CS helps

Tenant CS represents tenants, never landlords. We help clients decide whether to sublease, assign, surrender or sit tight, run the real numbers, and negotiate with landlords and subtenants so the deal protects your business, not just the other side's.

Book a call with us today to see how we can help you.

You may also like:

• Assignment, Subleasing, And Why It's Important To Negotiate The Right To Do Both
• Five Ways To Break A Commercial Lease
• Commercial Make Goods: How To Avoid Landlord Disputes
• Have An Upcoming Commercial Lease Expiry? Here's What To Do Next
• Commercial Leasing Checklist