What is a Sub-Lease or Head Lease?
A sub-lease and a head lease are two types of lease agreements that involve the renting of property from one party to another. In a sub-lease arrangement, a tenant (the sub-lessee) rents out all or part of the property they are leasing from the landlord (the head lessor) to another party. On the other hand, a head lease is the original lease agreement between the landlord and the tenant, who may then sub-lease the property to a sub-lessee.
Understanding Sub-Lease and Head Lease
Understanding the dynamics of sub-lease and head lease agreements is essential for tenants, landlords, and sub-lessees. Here are key points to grasp about these lease structures:
- Sub-Lease: In a sub-lease arrangement, the tenant (sub-lessor) rents out the property they are leasing from the landlord (head lessor) to a third party (sub-lessee). The sub-lessee pays rent to the sub-lessor, who in turn pays rent to the head lessor. The sub-lease agreement is typically subject to the terms and conditions of the head lease, with the sub-lessor assuming the responsibilities of a landlord for the sub-leased property.
- Head Lease: A head lease is the original lease agreement between the landlord (lessor) and the tenant (lessee). Under the head lease, the tenant has the right to occupy and use the property for a specified period, subject to the terms and conditions outlined in the lease agreement. The tenant may then choose to sub-lease all or part of the property to one or more sub-lessees, creating sub-lease agreements.
- Responsibilities and Obligations: In a sub-lease arrangement, the sub-lessor retains certain responsibilities and obligations as the primary tenant under the head lease. These may include paying rent to the head lessor, maintaining the property, and complying with the terms of the head lease. The sub-lessee typically has a direct contractual relationship with the sub-lessor and may not have any legal relationship with the head lessor.
- Risks and Considerations: Sub-leasing presents both opportunities and risks for tenants and sub-lessees. Tenants may sub-lease excess space to generate additional income or share the cost of renting the property. However, sub-leasing can also expose tenants to potential liabilities, such as breaches of the head lease or disputes with sub-lessees. Sub-lessees, meanwhile, should carefully review the terms of the sub-lease agreement and understand their rights and obligations.
Example of Sub-Lease and Head Lease
Consider the following example to illustrate sub-lease and head lease agreements:
- Head Lease: John signs a head lease agreement with a landlord to rent a commercial office space for his business. The head lease stipulates that John is responsible for paying rent directly to the landlord and complying with the terms and conditions outlined in the lease agreement.
- Sub-Lease: After occupying the office space for some time, John realizes that he does not need the entire space and decides to sub-lease a portion of it to another business, XYZ Company. John and XYZ Company enter into a sub-lease agreement, where XYZ Company agrees to pay rent to John and abide by the terms of the sub-lease.
- Responsibilities: As the sub-lessor, John assumes the responsibilities of a landlord for the sub-leased portion of the property. He collects rent from XYZ Company, maintains the property, and ensures compliance with the head lease. Meanwhile, XYZ Company pays rent to John and uses the sub-leased space for its business activities.
Conclusion
Sub-lease and head lease agreements are common lease structures used in real estate transactions. While a head lease is the original lease agreement between the landlord and the tenant, a sub-lease involves the tenant sub-leasing the property to a third party. Understanding the roles, responsibilities, and risks associated with sub-lease and head lease agreements is essential for all parties involved in the leasing process.
Reference:
- Legal Information Institute. (2022). “Sublease.” Legal Information Institute. Link