The commercial real estate market has a different working style and sub-leasing is an important part of the same. Hence, you must understand the concept and working process of sub-leasing in the commercial market of the Indian real estate sector.
- Concept of Sub-Lease
Sub-lease is a process where a person who is already a tenant on lease rent out the partial area or the entire property to someone else. Here the third person has to pay the rental amount and also has to follow the lease rules. But, the actual tenant is held responsible for the lease. There are two tenants, the first one is the original tenant hired by the landlord and there is a second tenant who is hired by the first tenant.
- Reasons for Sub-Leasing
There can be multiple reasons for sub-leasing a commercial property and first out of this is expansion. Yes, a tenant is likely to sub-lease the office space as the company is expanding out of the country and thus does not require such a bid space. But, the signed lease agreement is restricting the firm from moving out of the property.
Thus, a person or a company can keep a tenant to share the burden of a rental amount for the remaining period.
Another reason to sub-lease a property is cost-cutting or slowdown in the business. These factors led to the lesser workforce and this means using fewer resources like seating space, electricity and more. Hence, the company or a person feels that sub-leasing is a great idea as the burden of paying the rental amount till a particular time can be shared easily.
- Points to be considered for First Tenant
Right to Recapture is the rule that gives the landlord an option to move legally against the actual tenant. The important thing to understand is that an actual tenant can’t offer the same property for sub-lease as there are certain clauses in the Lease Agreement that needs to be followed.
According to this agreement, the original tenant cannot sub-lease the property if the same is not written on the papers. Secondly, if the Lease agreement permits to go into sub-lease then an area limit is defined. The above-mentioned rule comes into play if the actual tenant, sub-lease the area more than the defined limit.
Sub-Lease Rental Amount is a big thing to focus on as the rent yielded from sub-lease cannot be more than the actual rental amount written in the Lease Agreement. The original tenant has to keep this clause in mind as the landlord is eligible to keep the total extra amount or a percentage of the same earned from the sub-lease process.
Sharing of Utilities is another important thing to consider during the sub-lease process. The actual tenant should primarily look if the sub-lease area has separate electricity and water meter or not. In case, there is no such provision then a particular amount should be fixed and mentioned in the sub-lease agreement to keep the budget in balance.
Sharing of Space is also an important point as the actual tenant must assess if the entry and exit points can be separated or not. Apart from this, the allotment of parking space and salaries of security personnel are important to be mentioned in the sub-lease agreement.
Renovation must to be considered as the addition of another person to the same space means renovation but firstly check if you are not on the losing edge in this situation. The next important thing is the clause of premature termination that too before 90 days without the need to pay compensation for the same.
Nature of Business of the Second Tenant
Make sure you check about the nature of business before finalizing the sub-lease. The activity of the second tenant must fit in the Indian laws.
- Reasons for second Tenant look for Sub-Lease
The basic reason behind taking up a partial area is a startup. The company is setting itself in the market requires lesser resources as the employees are also a few in numbers. Hence, the startup companies look for such an opportunity to save more.
Points to consider for the second Tenants
Similar to the first tenant, the second tenant is also required to keep a few things in mind. Thus, in this blog post, we have listed all the things to remember for the second tenant.
Payment Default by Actual Tenant is the one big issue that can bring the second tenant in trouble. Hence, the sub-lease agreement on your part must have clear writing that the default in rental payment by the actual tenant will reflect on the total rental amount and thus he/she will be responsible for the loss.
Signage and advertisement are the two important factors that affect a business. Hence, the second tenant must seek clarity in the sub-lease agreement about putting up the signage and advertisement of the company in the vicinity of the building.
Maintenance is another big thing that should be talked about in the sub-lease agreement. The second tenant must take everything in written and hence the person responsible for maintenance should also be clearly mentioned in the sub-lease agreement.