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Head Leases vs Subleases in Commercial Real Estate Explained

Leasing commercial property can be tricky, especially when terms like “head lease” and “sublease” get thrown around. If you’re a business owner or an investor navigating the real estate world, understanding these two lease structures is crucial. But don’t worry—we’re breaking it down in a simple, straightforward way!

What is a Head Lease?

A head lease (also called a prime lease) is the original lease agreement between a landlord and a tenant. Think of it as the foundation of any leasing arrangement. This agreement sets the rules, rent, and responsibilities for the tenant who is leasing directly from the property owner.

Key Features of a Head Lease:

• Main Lease Agreement: Signed between the property owner (landlord) and the primary tenant.
• Long-Term Commitment: Usually has a fixed term, often several years.
• Direct Rental Payments: The tenant pays rent directly to the landlord.
• Full Control: The tenant has control over the property within the limits of the contract.

For example, if a corporation leases an office space for five years directly from a building owner, this would be considered a head lease.

What is a Sublease?

A sublease happens when the original tenant (who holds the head lease) rents out part or all of the leased space to another party. The new tenant (known as the subtenant) then pays rent to the original tenant instead of the landlord. However, the head tenant remains responsible for the lease with the landlord.

Key Features of a Sublease:

• Secondary Agreement: The head tenant creates a new lease with a subtenant.
• Shorter Term: Subleases tend to be shorter than the head lease duration.
• Head Tenant’s Responsibility: The original tenant is still accountable to the landlord.
• Can Cover Part or All of the Space: Some businesses sublease a portion of their office, while others transfer the entire space.

For instance, if a company has extra office space they no longer need, they might sublease that portion to another business to offset costs.

Head Lease vs. Sublease: The Key Differences

Now that we know what head leases and subleases are, let’s compare them side by side:

Pros and Cons of Head Leases

Pros:

• More Space and Flexibility: Tenants can design the leased area to fit their needs.
• Direct Deal with Landlord: No intermediaries, making negotiations smoother.
• Long-Term Stability: Ideal for businesses seeking a permanent location.

Cons:

• Higher Responsibility: The tenant must handle maintenance, taxes, and compliance.
• Long-Term Commitment: Not ideal if uncertain about future space needs.

Pros and Cons of Subleases

Pros:

• Lower Costs: Usually cheaper than signing a new head lease.
• Short-Term Flexibility: Great for businesses that need temporary office space.
• Simple Exit Strategy: No long-term obligations to a landlord.

Cons:

• Less Control: Bound by both the head lease and sublease terms.
• Potential Risks: If the head tenant defaults, the subtenant could lose the space.

Which Option is Best for You?

Choosing between a head lease and a sublease depends on your business’s needs. Here are some questions to consider:

• Do you need a long-term space commitment? → Go for a head lease.
• Are you looking for lower upfront costs? → Consider a sublease.
• Do you want direct control over the property? → Head lease is your best bet.
• Need flexibility and a short-term solution? → A sublease is a great option.

Final Thoughts

Understanding the difference between head leases and subleases is essential when dealing with commercial real estate. If you’re a business owner looking for office space, weigh the pros and cons of each lease type before making a decision.

Need expert advice on finding the right lease for your business? Our team at CMS Real Estate Ltd. is here to help. Contact us today to learn more about commercial leasing options!