Sublease

Subleasing refers to a lessee’s right to sublease the property they have leased-in whole or in part-to a third party without relinquishing their own status as a lessee. The sublessee enters into a direct contractual relationship with the principal lessee, not with the original owner. Subleasing is particularly relevant for leasehold properties, agricultural land, and commercial sites.

Legal Framework for Subleasing

Subleasing is not specifically regulated in the German Civil Code (BGB), but it follows the general lease provisions (Sections 581 et seq. BGB). The decisive factor is whether the original lease agreement permits subleasing or expressly prohibits it. In the absence of such a provision, subleasing generally requires the lessor’s consent. If a property is subleased without permission, this may give the lessor grounds for extraordinary termination. In the agricultural sector, the provisions of the Agricultural Leasehold Act (LPachtVG) also apply, which imposes specific requirements regarding written form, term, and minimum lease prices.

The termination of lease agreements follows different rules than the termination of rental agreements: Agricultural lease agreements covering longer periods cannot be terminated at short notice; terms of six to twelve years are often standard. For the sublessee, this means particular stability-but also dependence on the continuation of the main lease. If the main lease ends, the sublessee loses their right of use unless the owner transfers them into a separate lease agreement.

Distinction from Subletting and Hereditary Building Rights

Subleases and sublets are structurally similar but differ in one key respect: While a sublet involves merely granting the right to use a property, a lease additionally includes the right to derive benefits (income) from the property-such as agricultural harvests, rental income from a commercial enterprise, or forestry use. In the case of a building lease, on the other hand, the landowner transfers the right to build on their land, which is legally distinct and goes beyond a sublease.

In the commercial sector, subleasing occurs when a master lessee leases large commercial spaces or shopping centers and subleases them to retailers or other business operators. In this case, the master tenant is effectively an intermediate landlord who manages the property and acts as an intermediary between the owner and the end-user. This arrangement is legally complex and requires clear contractual provisions regarding liability, defects, and operational obligations.

Practical Significance and Risks

In practice, subleasing frequently occurs with allotment gardens (Federal Allotment Garden Act), agricultural operations, or the management of commercial spaces. It is important for investors to understand that the main tenant’s sublease income is treated for tax purposes as income from renting and leasing. Risks arise if the main lease and sublease agreements have different terms or if the main tenant becomes insolvent-the subtenant is then left facing the owner without a direct contractual claim.

When purchasing a property that is leased to a primary lessee, buyers should thoroughly review the lease agreement-including whether a sublease has been agreed upon or is possible. This affects both the actual use of the property and the liquidity of the investment. As part of our purchase advisory services, we review lease agreements for their real estate-related implications.

Practical Tip for Owners in Nuremberg and Franconia

In the greater Nuremberg area-especially in the surrounding countryside with its community garden associations and agricultural land in the Knoblauchsland region-subleasing plays a role that should not be underestimated. The Knoblauchsland region north of Nuremberg is one of Bavaria’s most significant vegetable-growing areas; lease and sublease arrangements between farmers are widespread here.

Owners who lease out their property should clearly stipulate in the lease agreement whether and under what conditions subleasing is permitted. We recommend having this reviewed by an attorney before signing the contract to avoid future disputes regarding contractual relationships and liability issues. Especially in the case of agricultural leases, it is worthwhile to consult an attorney specializing in agricultural law.

Frequently Asked Questions

Can a primary lessee terminate the sublease agreement?

Yes, the main tenant may terminate the sublease in accordance with the contractual and statutory notice periods. If the main lease ends, the sublease generally expires automatically-unless the owner voluntarily assumes the sublease or does so by virtue of statutory provisions.

Is the owner liable to the subtenant?

Generally, no. Since there is no direct contractual relationship between the owner and the sublessee, the owner is not directly liable to the sublessee for defects. The sublessee must assert any claims against the main lessee. Exceptions may arise if the owner actively influences the sublessee or if the circumstances are such that a de facto legal relationship is established.

Does a sublease need to be notarized?

Not generally, but a notarization requirement may arise if the lease covers land for more than one year and grants special rights. To be on the safe side, we always recommend a written sublease agreement with a clear term, payment terms, and provisions in the event of termination of the main lease.

What tax considerations apply to subleasing?

The main lessee who subleases land generates income from renting and leasing (§ 21 EStG). In this context, the master lease payments they themselves must make can be deducted as income-related expenses-the taxable profit is calculated as the difference between sublease income received and master lease payments made, plus other costs. Particular caution is warranted if sublease income consistently and significantly exceeds the master lease rent: The tax office may view this as an indication of hidden profit generation or classify it as a commercial activity, which would have different tax implications. We recommend consulting a tax advisor early on in complex sublease arrangements to ensure the correct classification of income.

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