The percentage in a profit-sharing clause gets negotiated; the definition of profit decides whether the landlord takes half the gain or twice it.
Sublease profit is the rent the subtenant pays, less the rent the tenant owes on the same space, less the costs of subletting, and the landlord takes its share only of what is left. On an illustrative 12,000 sq ft sublet at $46.00 against a $38.00 lease, the true profit over four years is $88,200, so a 50 per cent clause gives the landlord $44,100. Read as half of each month's excess rent with no deduction for costs, the same clause gives the landlord $180,000 and leaves the tenant $91,800 worse off for subletting.
Worked in full in How to Read a Commercial Lease by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Most commercial leases let the tenant assign or sublet with consent, and many add a profit-sharing clause: a stated share, often 50 per cent, of any "excess rent" or "sublease profit" goes to the landlord. The percentage gets the attention in negotiation. The definition of what is being shared moves far more money.
| Input | Value |
|---|---|
| Area sublet | 12,000 sq ft |
| Rent under the head lease | $38.00 per sq ft ($38,000 a month) |
| Months left on the head lease | 48 |
| Sublease rent | $46.00 per sq ft ($46,000 a month) |
| Free rent to the subtenant | 3 months |
| Brokerage | 4% of the sublease rent received |
| Fit-out contribution to the subtenant | $5.00 per sq ft |
| Legal costs | $15,000 |
| Landlord's share of profit | 50% |
| Line | Amount, $ |
|---|---|
| Sublease rent at $46.00 for 48 months | 2,208,000 |
| Less 3 months' free rent | −138,000 |
| Sublease rent received | 2,070,000 |
| Less head lease rent on the space | −1,824,000 |
| Excess rent | 246,000 |
| Less brokerage | −82,800 |
| Less fit-out contribution | −60,000 |
| Less legal costs | −15,000 |
| Net sublease profit | 88,200 |
Net profit = sublease rent received − head lease rent − costs of subletting
$2,070,000 − $1,824,000 − $157,800 = $88,200. Landlord's share = 50% × MAX(net profit, 0) = $44,100. In Excel, with rent received in B2, head rent in B3 and the three costs in B4:B6: =50%*MAX(0,B2-B3-SUM(B4:B6))
The $8.00 rent gap looks like $384,000 over four years. The free months, during which the tenant still pays its own rent, take $138,000 off it, and the costs of finding and fitting the subtenant take another $157,800. The tenant's real gain from the transaction is less than a quarter of the headline gap.
| Clause wording, in substance | Landlord gets, $ | Tenant keeps, $ | Landlord's share of true profit |
|---|---|---|---|
| (a) Half of each month's rent above the head lease rent | 180,000 | −91,800 | 204% |
| (b) Half of the rent gap over the term, after costs, free rent ignored | 113,100 | −24,900 | 128% |
| (c) Half of net profit after all costs and free rent | 44,100 | 44,100 | 50% |
Under reading (a) the landlord takes 50 per cent of $8,000 in each of the 45 paid months, $180,000, more than twice the whole profit. The tenant is left $91,800 out of pocket for a sublet that made money. Reading (b) allows the costs but measures the gap as if every month were paid, so the free rent is the tenant's alone. Only reading (c) makes the 50 per cent a 50 per cent.
Timing matters too. A clause that lets the tenant recover its costs before any sharing defers the landlord's first payment until the cumulative position turns positive. Here the tenant has $271,800 to recover first, the $157,800 of costs and three months of its own rent paid with nothing coming in, and at $8,000 a month the cumulative profit turns positive only in month 37. A landlord expecting a monthly payment from day one, and a tenant who believes it owes nothing until month 37, are reading the same clause.
| Sublease rent | True net profit, $ | Landlord under (a), $ | Landlord under (c), $ | Tenant after (a), $ |
|---|---|---|---|---|
| $40.00 | −171,000 | 45,000 | 0 | −216,000 |
| $42.00 | −84,600 | 90,000 | 0 | −174,600 |
| $44.00 | 1,800 | 135,000 | 900 | −133,200 |
| $46.00 | 88,200 | 180,000 | 44,100 | −91,800 |
| $50.00 | 261,000 | 270,000 | 130,500 | −9,000 |
At $40.00 or $42.00 the tenant is subletting to cut a loss, not to make a profit: it recovers part of a rent it would otherwise pay on empty space. Reading (a) still sends the landlord $45,000 or $90,000. The sublet only breaks even for the tenant, after costs, at about $44.00, and under reading (a) the tenant never comes out ahead in this range.
Negotiating the percentage and leaving the definition to boilerplate. A tenant that accepts "50 per cent of excess rent" without a costs deduction, a free-rent netting and a recovery-first mechanism has agreed to reading (a), and may find subletting uneconomic in exactly the market where it most needs to sublet. Landlords, for their part, should not assume the share will fund anything: on a market sublet with normal concessions, half of the true profit is a small number. Where the landlord also has a recapture right, the right to take the space back instead of consenting, it is that right, not the share, that captures most of the value of a strong sublease market.
Wording, consent standards and the treatment of assignments differ by lease and jurisdiction. The figures are undiscounted and illustrative; discounting would make the true profit smaller still, because the costs come first and the excess rent later.
The assignment and subletting provisions sit among the clauses priced in the free workbook and working documents for this book. The landlord's side of an early exit, rather than a sublet, is worked in how to calculate a lease termination fee.
Whatever the lease allows, which is why the definition matters. Typical deductions are brokerage, fit-out contributions, free rent given to the subtenant and legal costs. In the illustrative case they total $157,800 plus $138,000 of free rent, turning a $384,000 headline rent gap into a true profit of $88,200.
Fifty per cent is a common starting point, but the effective share depends on the definition. On the same sublet, 50 per cent of net profit pays the landlord $44,100, 50 per cent of the gap after costs but ignoring free rent pays $113,100, and 50 per cent of each month's excess pays $180,000, 204 per cent of the true profit.
If costs are recovered first, only once the tenant's cumulative position turns positive. With $271,800 to recover, $157,800 of costs plus three months of rent paid with no sublease income, and $8,000 a month of excess rent, the landlord's first share arrives in month 37 of 48.
This article is one calculation from How to Read a Commercial Lease. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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