What is Sublease?
The sublease is an agreement between the lessee and third party where the lessee transfers its tenancy to the third party for a certain period of time but in case of default by the third party, the lessee is obliged to pay the overdue rent and other charges mentioned in the lease contract to the lessor.
There is a difference between a lease and a sublease. The lease is an agreement between the landlord and lessee but a sublease is an agreement between a lessee and another party. In a lease possession of the property is transferred by the lessor to the lessee for a certain period and amount as agreed between them but in the case of a sublease, the tenant transfer the possession of that leased property to another party on the agreed terms.
How does it Work?
Sometimes, the process of subletting the property is incorporated into the original lease agreement or it is allowed by the lease agreement so that the owner of the property can control the person who lived on their property. When the tenant entered into a lease agreement with a third party, he has to inform the owner and take approval from them. By subleasing the property, the lessee is not free from his duty to pay the rent and other charges like compensation for damages, etc to the lessor. In case any default is committed by the subtenant or if the subtenant is unable to pay the rent and other charges to the tenant, so in that case, the tenant is liable to pay the overdue amount to the lessor. Further, it is the responsibility of the subtenant to pay the unpaid amount to the tenant. The laws regarding subletting are different in different states and cities.
Example of Sublease
Mrs. Samantha acquires property on lease for one period of a year in London. Here, Mrs. Samantha is the tenant. After five months, she got a project in Moscow for a few months. But, if she leaves the property she has to pay the contractual charges as she left the property before the agreed terms and she also loses the property. On the other hand, she didn’t leave the property she has to pay the rent in both cities. To avoid these circumstances, she provide the leased property rent to Mrs. Richet for those months and get the property back after she returned from Moscow. This agreement between Mrs. Samantha and Mrs. Richet is a sublease agreement. Here Mrs. Richet is a new Tenant. Mrs. Richet is liable to pay the rent to Mrs. Samantha and Mrs. Samantha is liable to pay the rent to the owner. In case, Mrs. Richet is unable to pay the rent for a few months, Mrs. Samantha is liable to pay the overdue (due but not paid) amount to the owner. This will be beneficial for both the lessor and lessee.
Reason for Sublease
Generally, the lease is for an agreed period, and sometimes it is not possible for the lessee to complete the tenure of the lease due to personal reasons like temporary relocation to another city or state and he didn’t want to lose the property. So, to get themselves away from the contractual fees or obligation (which he has to pay if he wants to get out from the lease before the completion of tenure of lease) and to avoid double payment of rent, the lessee subleases the property to another person for that period of relocation. Also, with this, the tenant also gets back the property when he returned to that city again. This is also beneficial for the lessor as he gets the rent for full lease period and there is no need to find another tenant for their property.
Subleasing Rental Property
It is necessary to inform and seek approval from the owner regarding subleasing as the property is owned by the owner and he can take legal action against the lessee for using their property illegally. There may be some clauses in the original lease contract regarding subleases that if the lessee subleases the leased property and charges the rent which is higher than the actual rent specified in the original lease contract, then the full amount or the portion of difference (Actual rent charged by the tenant from the third party – Rent as per the main contract)will be retained by the owner.
Sublease vs Sublet/Relet
The original contract of lease is signed between the owner and the lessee. In both the terms i.e. sublease or Relet, the third party is involved but the method of providing property on rent is different.
In a sublease, the lessee provides the leased property to the third party on rent for an agreed period and in case any default is committed by the third party, then the lessee is liable to pay the rent to the owner. Here, the third party is only liable to pay the rent to the lessee.
Whereas, in Sublet/Relet, the lessee transfers the possession of the leased property to the new tenant. But, here the new lessee is responsible to pay the rent to the owner in any case. In relet, the original lease agreement comes to end mutually and a new agreement is signed between the owner and new lessee
Thus, initially, the lease agreement takes place between the owner and the lessee. When the lessee transfers possession of the leased property to a third party on a rental basis then this scenario will result in a sublease. For entering into the sublease agreement, the lessee has to take the prior approval of the owner otherwise he can take legal action against the lessee. This sublease rent amount should not exceed the actual amount mentioned in the main contract. If it exceeds, the terms and conditions of the main lease contract regarding the sublease amount should also be kept in mind. This sublease terminology comes into the picture because sometimes it is not possible for the tenant to complete the tenure of the lease. Due to the sublease, the lessee gets back the property after some time by renewing the contract.
This is a guide to Sublease. Here we discuss the introduction to Sublease along with the working process, rental property, examples, and reason. You may also have a look at the following articles to learn more –
- Finance vs Lease
- Leveraged Lease
- Capital Lease vs Operating Lease
- Materiality Concept
- Accounts Receivable Aging