What is a Sublease?

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A sublease is when a tenant rents the property they’re renting to another tenant—essentially reassigning the lease. In most subleases, the tenant’s renter covers all or a majority of the property’s monthly rent payments. Subleasing can keep tenants from breaking their original lease while someone else pays their rent. 

For example, a tenant’s job forces them to move before the end of their rental agreement. Subletting their rental can keep them from violating their rental agreement and eviction. The new tenant assumes responsibility for the rent amount. 

Subleases are also called sublets. A property’s original tenant is called the sublessor or sublandlord and new tenants are sublessees or subtenants.

How Does a Sublease Work?

In a typical sublease, a property’s original tenant identifies a subtenant. The sublessor and sublessee sign a written agreement.  The written agreement defines the obligations for which the sublessee is responsible. These details include a security deposit and rent payments. Often, the sublandlord gets their landlord’s consent before subletting, either verbally or in writing. And sometimes, the landlord signs the written agreement between the sublessor and sublessee. The contract between the sublessor and sublessee does not replace the original tenant’s rental agreement. Instead, it’s a new document outlining the sublessee’s obligations to the sublandlord.

For example, the sublessee pays a security deposit and rent to the sublessor, not the landlord. But the original tenant’s rental agreement remains in place. As such, they owe the property owner rent, even if the sublessee fails to pay them. They’re accountable for nonpayment of rent and related late fees. The subtenant is also liable for any damage to the rental unit.

What Is the Difference Between Leasing and Subleasing?

Leasing is a contract between a property owner or property manager and a tenant. Subleasing, on the other hand, is an agreement between a tenant who rents a home to a new tenant. In a sublease, the original tenant keeps their lease with the landlord but creates a new agreement where the sublessee pays them to stay in the unit.

So unlike a standard lease, where a tenant and landlord have a rental contract, a sublease allows the tenant to rent their home to someone else.

State and City Laws for Subletting

There are many legal implications of subletting for real estate investors.

First, it’s essential to note that laws about sublease agreements vary by state and city. You need to know the local laws and regulations where your rental property is located. You may want to consult a lawyer or law firm to make sure you understand what’s allowed and required of you as a landlord.

In New York City, for example, tenants in buildings with four or more units can sublet their apartments no matter what their original lease says. This rule doesn’t apply to co-ops and public housing, though.

Landlords should account for subletting in their original lease agreements with new tenants. If you don’t want to allow for subleasing and you’re not required by law to do so, make sure your contract states this. 

How to protect yourself

If you’re OK with subleasing, then you should define the process and terms for subletting in your rental agreement. Do you want to review potential subtenants? Or, you might require your signature on any contract between the sublessor and sublessee. You need to include details like these in your rental agreement.

Your legal rights and responsibilities as a landlord vary based on your rental property’s location. The smartest approach is to seek legal advice if you’re considering subletting your property.

Subleasing Example

There are several reasons a tenant and landlord may come to an agreement to sublet a property. Here’s a brief example to consider:

Let’s say you lease to a tenant who recently moved in because they got a new job nearby. This tenant signed a 12-month lease and may stay longer if things work out. Unfortunately, after only a few months, the tenant informs you that they have to move because they need to care for an aging parent who fell ill. This tenant still has nine months left on their lease, and they’ve asked you if they can sublet the apartment.

If you don’t want to allow the tenant to sublease, then you break your lease agreement with them and you’ll need to find someone else to rent the place. To avoid having your rental unit empty, and hence, unpaid rent, you can decide to sublease the apartment through the tenant. This way, the apartment stays rented and someone keeps paying rent.

The tenant will be responsible for finding someone to sublease the unit to, and they’ll also be on the hook for ensuring you get your rent money each month. 

The Pros and Cons of Subletting

In deciding whether to allow subletting, real estate investors should consider the pros and cons.

The pros of subletting include:

• Your property continues generating income. If your tenant moves, your rental property might stop earning money.
• Someone is in your property. Having a vacant unit poses a risk. By subletting, you’ll have someone in your rental property to alert you of anything needing repair. And their presence can cut down on vandalism or theft.
• You don’t have to find a new tenant. In many subletting situations, the original tenant finds a subtenant. That relieves you from having to spend time and money getting a new renter – and if you trust your tenant, there’s a decent chance their subletter will be equally good.  
• You earn a good reputation. Allowing your tenants to sublet can make your renters happy with you as a landlord. That positivity can lead to them referring others to you, making it easier for you to find future tenants.

At the same time, there are some cons of subletting, such as:

• Subtenants might be less qualified than the original tenants. Your tenant might not be as rigorous as you when finding a sublessee. They may select someone with a worse credit rating or less income than you’d prefer.
• You may not have a contract with the sublessee. The sublessor and sublessee may sign a written agreement without you. If so, you don’t have a contract with the subtenant. That can cause you legal issues if the subtenant doesn’t pay rent or damages your property.
• You could lose out on money. Your tenant could ask their sublessee more for rent than you were charging. If you’re not a party on the sublease agreement, the sublandlord isn’t required to pass the full rent amount on to you. In this scenario, you’re losing income you might otherwise get from your subleased property.

What Real Estate Investors Should Know About Sublease Agreements

Whether you allow for subleasing depends on your comfort with it and your rental property’s location. Depending on state and city laws, there are some sublease guidelines to follow, including:

• Seek legal advice. You must know the laws where your property’s located. And you need to make sure your lease agreement is within the law and enforceable.
• Determine how involved you want to be. Are you OK with your tenant finding a subtenant without your involvement? If not, do you require your written permission before they proceed with a sublessee?
• Decide how you’ll screen subtenants. Do you want to review a sublessee’s credit rating before they sign an agreement with your tenant? Or, are you comfortable allowing your tenant to vet potential subtenants? 
• Define rent payments. You can stipulate in your lease agreement that your tenants owe you all rent collected through a sublease agreement. This rule keeps sublessors from charging sublessees more rent than you’re charging them.
• Choose if you want to allow short-term rentals. Are you alright with your tenants listing your property on a service such as Airbnb or VRBO? What about subtenants? 

In most places, the choice of whether to sublease is up to landlords. As a real estate investor, you have to decide to sublease based on your risk tolerance and business model. If you choose to allow sublets, it’s crucial to define the details in your lease agreement.

Learn More About Subleasing/Subletting

Find out more about subleasing so you can be sure you truly understand these real estate concepts:

Sublet or Save: This Strategy Can Help You Buy a House Several Years Faster

What is a Master Lease and How Can Investors Use It to Scale?

Airbnb Rental Arbitrage: How to Make Money Without Owning Property

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.