Tenants typically rent an entire property or space. However, lifestyle changes may happen during the course of their lease agreement. This occurs when family members move out, clutter is disposed, or additional income is needed. One great idea to maximize spare rooms or extra spaces is to rent it out to a third-party, commonly known as a “sublease.”
A sublease occurs when the original tenant leases out a smaller space inside the entire property. The tenant who has signed a prime or original lease can act as the “landlord” in this case. Since sublease agreements involve a third-party tenant who may be oblivious to the prime lease, it is therefore the sublessor’s responsibility to ensure that both agreements are seamlessly enforceable.
Here are some important definitions that you will encounter in a subleasing agreement:
Only enter into a sublease agreement if your extra space has been unused for a long time. It will be a big inconvenience for the subtenant if you still use the space he or she is paying for.
Instead of ending the master lease or original lease earlier and forfeiting your security deposit, why not get a tenant to finish the contract for you? A sublease is not limited to a smaller space in the entire property. It can be extended to the entire property itself. The new tenant (subtenant) can rent the entire property while agreeing to continue your contract.
Desperate times mean desperate measures. One way to sustain your cash flow is by renting out that unused space. By welcoming a subtenant, you can make extra income.
If family members are going to live with you for a long time, why not let them enter into a sublease? Formally entering into a sublease agreement makes sure that promises are kept and that financial responsibilities are kept in check. Plus, you won’t have to worry about security and trust if you have your family member as a subtenant.
Step 1 — Photocopy the prime (original) agreement.
Find your original agreement and photocopy it. This will allow you to highlight important provisions so that nothing is missed when you draft the sublease agreement. You may also show this to your subtenant if ever he or she requests it.
Step 2 — Secure the owner’s approval.
If the original agreement does not say anything about subleasing, check with the original landlord. Whether governing laws state that you should get your landlord’s signature or not, it’s best to inform him or her.
Step 3 — Calculate your monthly rent.
Measure the total floor space in square feet of the area you want to rent out. Compare with your existing rent per square feet and calculate how much you should charge.
Step 4 — Set-up the space.
Like a regular rental, the space must be in good condition so that you can get inquiries. Set it up and take pictures. Make sure that the room design fits the personality and demographics of your ideal subtenant.
Step 5 — Find a subtenant.
Once you have the rent amount and pictures of the room or space, list it online. Alternatively, you may have it published in the local newspaper.
Step 6— Finalize the sublease agreement.
Talk with your prospective subtenant and agree on the provisions of your sublease contract. You may draft one using our free sublease agreement below. This is fully editable, so you can easily make changes during your negotiation with the subtenant.
Step 1 — Choose your preferred program and download the file.
Download either of the two file types. They must be compatible with your computer’s existing programs:
If the file opens, you’re good to go and may now proceed to the next step.
However, if the file does not open, it may mean that you do not have the right program.
Step 2 — Fill out the opening declaration.
Begin the sublease agreement by typing the general details inside the opening paragraph:
Step 3 — Complete the sublease agreement recitals.
For the recitals, the following should be typed or written on the following blanks:
Step 4 — Indicate the amenities and terms.
Section 1 of the agreement details the amenities and general provisions. You may tick the box that applies for each part.
Note: “As-is where-is basis” – This phrase means that the unit or space is acceptable in its current state.
Step 5 — Identify the duration of the sublease.
Now, for section 3, the term must be stipulated in the sublease agreement. Before filling this out, the original tenant must make sure that he or she has already secured a long-term contract with the original landlord or lessor.
Step 6 — Write down the financial aspects of the sublease.
Just like any residential rental contract, a sublease agreement adheres to the same financial obligations. In this section, the following should be supplied:
The subtenant and the original tenant must also agree on the payment type that is convenient and acceptable to both. This may be through bank transfer or through post-dated checks. If a property manager visits the premises often, the subtenant may opt to give it to him or her. Otherwise, payments are typically handed to the original tenant.
Step 7 — Review the standard paragraphs.
Sections 4 to 11 are all standard provisions in residential leases. It is best if both the original tenant and the subtenant review these terms before signing the sublease agreement. If there is a need to revise any of these, FormsPal recommends consulting with a lawyer or any legal counsel.
Step 8 — Affix your signature (for the sublessor and the sublessee).
Once both the subtenant and the primary tenant agree to the terms set forth in the sublease agreement, they must sign all pages. Then, for the second to the last page, they should write the following:
Step 9 — Secure landlord approval.
Laws vary from state to state. Though most require original lease (also called “prime” or “master lease”) tenants to obtain the permission of the original landlord, some states do not have a fixed governing law. Regardless of where the property is located, it is still best to inform the landlord and respect him or her by properly asking for permission to sublease. The last page of the agreement allows you to do this.
Step 10 —Add riders to the agreement.
Since the original tenant and the subtenant will typically share the premises, both parties can attach the following riders if applicable:
Any property can be used for sublease as long as:
Though a verbal sublease contract is legally enforceable, the hearsay nature of this agreement will make legal proceedings chaotic. Therefore, it is highly encouraged that a sublease agreement is written so that both the primary tenant and subtenant can rest assured that conditions in the agreement will be followed.
Terminating a sublease agreement is similar to any lease. The subtenant must simply write to the original tenant that he or she will be terminating it early. The subtenant must then go through the turnover process as agreed upon. However, this may mean that the security deposit will be forfeited.
You may refer to Section 2 (Lease Term) of our free downloadable template.
There will always be security concerns when you sublease. To avoid safety issues and property damage, make sure to do a full background check on your subtenant. It is important to note, however, that in a sublease, the original tenant is still fully responsible for the entire property. If the subtenant violates the prime or master lease, the original tenant must immediately make amends. In some states, the primary tenant can be spared from damages caused by the subtenant if a waiver between the three parties has been signed. On the other hand, if the subtenant has paid a security deposit, then it shall be used to amend the problem.
The primary tenant’s additional income will be reported to the Internal Revenue Service using Form “Schedule E (Form 1040 or 1040-SR), Supplemental Income and Loss”. At the beginning of the rent, the security deposit given by the subtenant should also be reported. These are then typically adjusted when lease terms end and deposits are returned.
A sublease agreement is a great way to make use of extra space to gain another source of income. Still, it comes with its pros and cons. The original tenant (sublessor) must weight this advantage against security concerns, additional responsibilities, and the effort of writing a sublease agreement. To make the subleasing process easier, you may download our free agreement template above.