Commercial property leasing involves a lot of technical jargon that business owners may not be familiar with, especially when trying to lease your first commercial property. Terms like “head lease” and “sublease” often come up, but understanding the differences is crucial to making the right decision for your business.
At CMS Real Estate, we believe in empowering our clients with the knowledge they need to make informed choices. Here’s a breakdown of the key differences between a head lease and a sublease, pros and cons, and how each lease can fit into your business needs.
Understanding a Head Lease
A head lease, also known as the primary lease, is an agreement between a landlord or property owner and a tenant. In this situation, the tenant, often referred to as the “head lessee,” holds the legal responsibility for fulfilling the terms of the lease. This includes making rental payments, adhering to agreed-upon maintenance responsibilities, and managing other contractual obligations.
Headleases provide tenants with more control and flexibility in their leasing arrangements. For example, the head lessee can negotiate directly with the landlord on lease renewals, space expansion options, and rental incentives. Many landlords also offer perks to attract long-term head lease tenants, such as discounted parking, rent-free periods, or tenant improvement allowances to customize the space for the business’s needs.
However, headleases often come with higher rental rates and longer-term commitments, which may require greater financial exposure. This makes head leases more suitable for businesses with established growth plans and stable financials.
What is a Sublease?
A sublease occurs when a tenant under a head lease (the “sublandlord”) leases part or all of their rented space to another party, known as the “subtenant.” While the subtenant occupies the space and pays rent to the sublandlord, the ultimate responsibility for the lease terms remains with the original tenant.
Subleases often appeal to businesses looking for short-term flexibility or lower rental costs. Because subleases typically offer discounted rental rates compared to head leases, they are an excellent option for businesses in the early stages of growth or those uncertain about their long-term needs. Additionally, subleases can be a way for companies to test a new market or location before committing to a long-term agreement.
On the downside, subleases come with limitations. Subtenants generally lack direct communication with the landlord and have minimal negotiating power for lease extensions or improvements. Moreover, the subtenant assumes a degree of financial risk if the original tenant defaults on the head lease terms, as this could lead to eviction or other complications.
Pros and Cons of Each Lease Type
Head Lease: Key Benefits and Drawbacks
Pros:
- Direct negotiation with the landlord for long-term planning.
- Potential incentives, such as tenant improvement allowances.
- Greater control over the space and lease terms.
Cons:
- Higher rental rates.
- Longer-term commitments that may not suit all businesses.
Sublease: Key Benefits and Drawbacks
Pros:
- Typically lower rental rates compared to headleases.
- Shorter terms are ideal for businesses with evolving needs.
- Opportunity to lease spaces “as-is” with minimal upfront investment.
Cons:
- Limited flexibility for expansion or lease renewals.
- Higher financial risk if the original tenant defaults.
- Reduced ability to customize the space.
Blended Lease Transactions: A Third Option
A blended lease transaction may be an ideal solution for businesses combining the advantages of both head leases and subleases. This lease arrangement allows a subtenant to secure discounted rental rates during the sublease term while simultaneously negotiating a long-term head lease with the landlord. Blended leases offer reduced financial risk, greater flexibility, and access to tenant incentives, making them a strategic choice for businesses aiming to balance cost and control.
How CMS Real Estate Can Help
Navigating headleases and subleases can be complex, but CMS Real Estate is here to simplify the process. With decades of experience in Calgary’s commercial real estate market, we specialize in helping businesses find the right leasing solution tailored to their goals. Whether you’re exploring a head lease, sublease, or blended lease, we provide personalized guidance, market insights, and negotiation expertise to ensure you make the best decision for your business.
Ready to learn more about our commercial property leasing services in Calgary? Contact CMS Real Estate today.
Gerry Macdonald Sr: (403) 219-0151
Gerry Macdonald Jr: (403) 219-0161
Jessica Macdonald: (403) 291-0425
Blog posts from CMS Real Estate are for general information only. The content should not be considered real estate management or investment advice. If you are in need of professional real estate advice, please contact our team.