What is a sublease in industrial real estate?

What is a sublease in industrial real estate?

A sublease is a lease-within-a-lease: the original tenant on a commercial property (called the sublandlord or head tenant) enters into a new lease agreement with a third party (called the subtenant) to occupy all or a portion of the space the original tenant has already leased from the building owner (the head landlord). The subtenant pays rent to the sublandlord, not to the head landlord. The sublandlord continues to pay rent to the head landlord under the terms of the original head lease and remains fully liable for all obligations under that lease — including rent payments — regardless of whether the subtenant performs. In GTA industrial real estate, subleases represent a meaningful segment of available inventory at any given time. When industrial tenants sign 5- or 10-year leases and their business circumstances change — a merger, a contraction, a shift to offshore logistics, or a move to a larger or smaller facility — they are often locked into space they can no longer use efficiently. Rather than paying rent on empty bays, these tenants come to market with sublease opportunities, typically offering the space at a discount to current direct lease asking rents to attract an occupier quickly. **Sublease vs. assignment: what is the difference?** A sublease and a lease assignment are both mechanisms for transferring occupancy of leased space, but they work differently and carry different risk profiles. In a sublease, the original tenant retains their legal relationship with the head landlord. The original tenant is still the party on the hook for rent, operating costs, and all other lease obligations. The subtenant's obligation runs to the sublandlord, not to the head landlord. If the subtenant stops paying rent, the sublandlord still owes the head landlord every dollar under the head lease. The sublandlord has a claim against the subtenant for the default, but the head landlord's recourse is against the sublandlord. In an assignment, the original tenant transfers their entire interest in the lease to the incoming party (the assignee). The assignee steps into the original tenant's shoes and assumes all obligations under the lease directly with the landlord. Depending on the lease language and whether the landlord provides a release, the original tenant may or may not remain liable as a guarantor after the assignment. Assignments are typically used when the original tenant is exiting the space entirely and permanently; subleases are more common when the original tenant wants to shed space for a defined period but may eventually reclaim it, or when the landlord will not consent to a full assignment. Most GTA industrial leases require landlord consent for both subleases and assignments, and most head leases give the landlord the right to recapture the space (take it back directly) if the tenant requests consent to sublease or assign. Tenants should review the recapture provisions carefully before approaching their landlord. **Why do tenants sublease their industrial space?** The most common drivers of industrial subleases in the GTA include: *Downsizing:* A tenant signed a 10-year lease on 100,000 square feet but five years in, due to automation, offshore sourcing shifts, or a restructuring, only needs 40,000 square feet. Subleasing the excess 60,000 square feet allows the tenant to recover a portion of their ongoing occupancy cost. *Relocation:* A tenant has found a better-located or larger facility and signed a new lease before their existing term expires. The old space must be subleased to avoid double-rent exposure during the overlap period. *Business contraction or closure:* A division is shutting down or a company is winding up operations in the GTA. The lease obligation does not disappear with the business activity; subleasing is the fastest path to cost recovery. *Excess space from growth planning:* A tenant leased more space than they immediately needed, anticipating growth that did not materialize on schedule. Subleasing the excess carries the tenant until they need the full footprint. *Merger or acquisition:* Post-transaction consolidation leaves the combined entity with redundant facilities. One or more leased properties are brought to market as subleases while the head tenant works toward a negotiated lease termination or runs the sublease through to the end of the term. **Sublease pricing in the GTA industrial market** Subtenants in the GTA industrial market typically pay below the current market direct lease rate for comparable space. The discount reflects several factors: the sublease term is fixed and cannot be extended beyond the head lease expiry; the subtenant cannot negotiate directly with the head landlord on lease terms; the space may have been configured for the sublandlord's specific use; and the subtenant is taking on counterparty risk against the sublandlord rather than the building owner. In the current GTA industrial market (2025–2026), sublease discounts relative to comparable direct space typically range from 10% to 25% below asking net rents. In submarkets where direct availability is tight and landlords are holding firm on face rents, sublease discounts compress; in submarkets with elevated direct availability, sublease discounts widen as subtenants have more alternatives. Net rents on GTA industrial sublease space currently range from approximately $12.00 to $17.00 per square foot depending on submarket, building vintage, and remaining term — compared to direct asking rents of $14.00 to $20.00 in the same corridors. One important nuance: subtenants still pay operating costs (TMI/NNN) at the actual building rate, just like a direct tenant. The sublease discount applies to the net rent component only; additional rent (property taxes, insurance, CAM) is passed through at the actual building rate regardless of the sublease discount. **Landlord consent requirements** Virtually all GTA industrial leases require the tenant to obtain the head landlord's written consent before subleasing the space. The head lease will specify the process: the tenant typically must provide written notice of the proposed sublease, identify the proposed subtenant, supply financial information on the subtenant, and obtain the landlord's written consent before the sublease commences. Landlords in Ontario generally cannot unreasonably withhold consent to a sublease if the proposed subtenant is creditworthy and the proposed use is consistent with the permitted use under the head lease. However, many GTA industrial leases include a recapture right — the landlord's option, on receiving the sublease consent request, to terminate the head lease and deal directly with the incoming occupant. Tenants should be aware that requesting sublease consent can trigger a recapture, potentially accelerating their exit from the lease and their ongoing liability. From the subtenant's perspective, it is essential to review both the head lease and the sublease agreement carefully. The subtenant's right to occupy is derivative of the head tenant's right; if the head tenant defaults on the head lease and the head landlord terminates it, the subtenant's occupancy rights may terminate as well, even if the subtenant has been paying rent to the sublandlord perfectly. Sophisticated subtenants should request a non-disturbance agreement from the head landlord — a commitment that, in the event of head tenant default, the head landlord will honour the subtenant's occupancy as long as the subtenant performs its obligations under the sublease. **Risks for subtenants** The primary risk for an industrial subtenant is the insolvency or default of the sublandlord. If the sublandlord stops paying the head landlord — due to financial distress, closure, or bankruptcy — the head landlord may terminate the head lease, extinguishing the subtenant's occupancy rights. A non-disturbance agreement addresses this risk but is not always obtainable. Additional risks include: the subtenant cannot typically extend their term beyond the head lease expiry, creating a hard move-out deadline that may arrive at an inconvenient time; the subtenant cannot negotiate lease terms directly with the head landlord during the sublease period; the space may require modifications to suit the subtenant's operations, and the sublandlord may resist or limit alterations; and the subtenant's security deposit is held by the sublandlord, not the head landlord, adding counterparty credit exposure. **How to find sublease space in the GTA industrial market** GTA industrial sublease opportunities are listed through commercial real estate brokers on platforms such as CoStar and Altus Data Studio, and are also brought to market through broker-to-broker networks before formal public listing. Working with an industrial tenant representative who monitors the full GTA sublease inventory — including off-market opportunities — is the most efficient way to identify suitable sublease space. Michael Law tracks GTA industrial sublease inventory across all major submarkets including Mississauga, Brampton, Vaughan, North York, Etobicoke, Scarborough, Pickering, Ajax, Whitby, Oshawa, and the Highway 400 corridor. If you are looking for sublease space in the GTA — or if you are a tenant with excess space to sublease — contact Michael at mlaw@lennard.com or (416) 569-6722 for a current inventory review and no-obligation consultation.