What’s the Difference Between a Headlease and a Sublease?

exterior of a tall glass office building, with a blue sky with fluffy clouds to the left of it
There are many differences between a headless and a sublease. This article explains the differences between the two, as well as the pros and cons of each.

If you’re looking for office space in Calgary, you have likely heard the terms headless and sublease, and may be wondering the difference between the two, and which choice is better for you. In this article we will discuss the differences between a headlease and a sublease, as well as the pros and cons of each, so you can make a more informed decision when you’re looking for commercial real estate for your business.

A headlease is the primary lease that is signed between a tenant and a property manager. The tenant, or head lessee, is contractually responsible for the terms of the lease and in most lease agreements, they have the ability to sublease the space if they so wish.

A sublease agreement, on the other hand, is a lease agreement made between the tenant and a subtenant, where some or all of the office space is leased to the subtenant but the ultimate responsibilities for the lease remain with the tenant. See a more detailed definition of a sublease or subletting in our commercial real estate glossary.

Below are the pros and cons to both leasing and subleasing office space in Calgary. For more information or if you have any questions, please Contact Us.

Headlease: The Pros and Cons

Pros:

  • The head lessee has the ability to negotiate directly with the landlord, which provides more flexibility when it comes to long-term planning such as lease renewals, expansion rights and the leasing term. Expansion options should be negotiated prior to signing of the lease.
  • In a tenant’s market, a landlord will provide many incentives to secure your tenancy, such as free rent, improvements to the office, the ability to reconfigure the premises and discounted parking rates. Some landlords may even fully build and design space to meet the tenant’s requirements.

Cons:

  • Headlease rental rates are generally higher than comparable sublease opportunities.
  • Prospective landlords will also typically demand a longer lease term commitment in a headlease agreement, with higher costs and exposure to the tenant.

Sublease: The Pros and Cons

Pros:

  • Sublease agreements often equal shorter lease terms, which are particularly important when you are a growing business and long-term office space needs are difficult to determine.
  • With a sublease you can expect a lower rate which is discounted from the handlord’s headlease rate. Historically, in a stable market, subtenants have received discounted rental rates in relation to the remaining term on the sublandlord’s lease. Below are the average rental rate discounts vs. the terms remaining. Note, these are estimates in a stable market at 6% vacancy, and will vary depending on market demand and conditions.
    5 years of term remaining = 10% discount
    4 years of term remaining = 20% discount
    3 years of term remaining = 40% discount
    2 years of term remaining = 60% discount
    1 year of term remaining = 80% discount
    Less than 1 year remaining = Operating costs only

Cons:

  • There is a lack of flexibility with subleasing, since the sublease tenant does not have a direct relationship with the landlord. Options under a headlease such as renewal and expansion options cannot assigned to a subtenant.
  • The space is generally offered as is. A tenant improvement allowance can be very limited or not available at all.
  • There is a higher financial risk for subtenant if the tenant defaults on terms of the Headlease. In the event of a default, the subtenant may be held fully responsible for arrear payments and the landlord may request the subtenant to vacate the premises. To reduce this risk, it is good business practice to understand and review a tenant’s covenant prior to removing conditions of a sublease transaction.

NOTE: Blended Lease Transaction
While not as common, there is also a third option, called a Blended Lease Transaction.

This is a great option for those who are interested in leveraging the strengths of both the sublease and headlease space. A blended lease can give you the best terms at the least amount of risk, and at the best price.

An experienced and trusted real estate broker can handle a dual negotiation with the landlord and tenant, providing the subtenant below market rental rates during their sublease term and securing a long-term headlease transaction. A blended lease will often include a tenant inducement package made available to the tenant immediately.

Bedrock Realty is a commercial real estate brokerage representing only tenants, so there is no conflict of interest and you can ensure you are always getting the best possible deal. For more information or assistance negotiating your next commercial lease, learn more About Us or Contact Us.