How To Sublet A Commercial Lease
Subleasing can be an invaluable solution to businesses locked into long commercial leases with no option of early termination. Commercial tenants may consider subletting their premises for a variety of reasons. For those facing tough economic conditions, for example, renting out part of their workspace can be a sensible, convenient way of cutting costs. However, subletting commercial leases can be complex, and the process is littered with traps for the unwary.
Here, we explain what a sublease is, and when subletting your commercial premises might offer a practical solution to a commercial issue. We consider the pros and cons of subletting, and explain the process involved.
What is a sublease?
When you lease commercial property, the landlord grants you exclusive use of the premises for an agreed term, usually in return for rent. Well-drafted leases clearly define the scope of the parties’ rights and obligations in respect of the premises, and contain terms relating to matters such as the length of the lease and dispute resolution.
When you sublet your commercial property, you grant use of the whole or part of the premises to a third party. You remain the tenant under your lease – which becomes known as the ‘head lease’ – and become the landlord under the sublease. The term of the sublease must not exceed the remaining term of the headlease.
When might you consider subletting your commercial premises?
Subletting a commercial lease may offer a practical solution in various scenarios, including the following:
- You have space in the premises that you are paying for under the head lease, but do not use.
- You are not physically occupying the property, for example, because your business has relocated to larger premises.
- Your economic conditions are such that you need to close your business but want to avoid any costs associated with exiting the head lease.
- You need an additional income stream and have sufficient space to accommodate a third party on the premises.
What are the pros and cons of subletting your commercial premises?
The pros of subletting your commercial premises include the following:
- You can reduce your costs and improve your cash flow.
- You can share the costs of utilities, such as gas, electricity and water.
- You retain your interest in the premises under the head lease, so you have an opportunity to return in the future if you wish.
The cons of subletting include the following:
- You remain liable under the terms of the head lease, including for the rent. If the subtenant does not make their rental payments under the sublease, you would have to cover them from your own pocket, or risk breaching your head lease. This is a crucial element of subletting, and its impact must be fully appreciated before you proceed.
- You assume some of the responsibilities and burdens of a landlord, including having to collect rent from your subtenant.
- Your landlord must agree to you subletting the premises. If they are unlikely to do so, subletting may not be an option. We consider the issue of your landlord’s agreement in more detail below.
Do you need your landlord’s agreement to sublet your commercial premises?
If your lease does not expressly prohibit subletting, you do not need your landlord’s consent, and there is nothing to stop you from entering into a sublease of the premises.
However, most landlords insist on including clauses in a commercial lease expressly addressing the issue of subletting. Absolute prohibitions on subletting are rare as few tenants would tolerate them. Instead, most leases oblige the tenant to seek the landlord’s permission before proceeding with any sublease. Landlords who agree will often impose strict conditions upon any subletting arrangement to retain control of the premises and protect their position.
A typical subletting clause states that the tenant shall not sublet the premises, or any part of them, without the landlord’s consent, which shall not be unreasonably withheld or delayed. If you do, the sublease will be deemed void, and the landlord may seek to terminate the head lease.
When can a landlord withhold consent to subletting commercial property?
Your landlord can only refuse a proposed sublease on reasonable grounds. They must decide within a reasonable time frame and serve notice of their decision on you. The notice must explain their reasons for refusal or set out any conditions of their acceptance.
- What are ‘reasonable grounds’ for a landlord withholding their consent to a sublease?
What will constitute ‘reasonable grounds’ for refusing your application to sublet will depend on the circumstances. Grounds that might be deemed reasonable in one case, might not be in another.
One example of a reason that might be considered reasonable is when the subtenant’s proposed use of the premises does not fit with the landlord’s desired business mix, such as in a shopping centre. Another is where the payment of a reverse premium to the subtenant risks adversely affecting the property’s rental value.
If your lease details specific circumstances in which the landlord can refuse consent, a refusal on those grounds will likely be deemed reasonable.
- What is a ‘reasonable time’ for your landlord to decide your application to sublet?
A reasonable time for your landlord to decide whether to consent to your proposed subletting arrangement is fairly tight and likely to be weeks rather than months. The rationale is that any delay may jeopardise the proposed arrangement with the subtenant, and the deal may fall through.
If your request is particularly urgent – because your proposed subtenant is threatening to pull out, for example – your landlord could be expected to give a response within a couple of days.
What conditions might a landlord impose on subletting?
Most landlords who consent to subletting only do so on the basis of strict conditions. Examples of the most common conditions landlords insist on include the following:
- The subtenant provides a rent deposit or guarantee.
- The subtenant agrees to comply with the terms of the head lease, or the sublease is in the same form as the head lease.
- The rent under the sublease is not less than the open market rent or the rent payable under the head lease.
- The sublease must not be given on the basis of the payment of a premium.
How do you obtain your landlord’s consent to subletting?
Your lease should detail the procedure for applying for your landlord’s consent to subletting, including how the application should be sent and to whom.
Your application must contain all the information your landlord needs to make an informed decision about your proposed sublease. Examples of the types of information you should include are as follows:
- Details of the proposed subtenant, including the industry they operate in and their trade or business.
- Particulars of the premises you propose subletting and whether it’s the whole or part.
- Information regarding the subtenant’s proposed use of the premises.
- The draft sublease.
This list is not exhaustive. Your commercial property solicitor will prepare the application on your behalf, ensuring it contains all information required to maximise the chance of obtaining your landlord’s agreement and reduce delays.
You will need to pay your landlord’s legal costs of dealing with your application in addition to your own.
What should you do if your landlord refuses your application to sublet or delays in making a decision?
If your landlord refuses your application to sublet, the first thing to do is to ascertain their reasons for refusal. There may be scope to negotiate with the landlord and change your application to address their concerns. If your landlord is unmoving and their refusal seems unreasonable, you could apply to the Court for permission to proceed with the sublease.
If your landlord seems to be dragging their heels, you should contact them again, giving them a final deadline to respond before you take legal action.
If you proceed with the sublease without first obtaining the landlord’s consent, you will be in breach of the lease and run the risk of your landlord suing you for damages or forfeiting the lease.
What are your rights if your landlord refuses your application to sublet?
If your landlord unreasonably withholds their consent to your sublease or delays in addressing your application, they will be in breach of the lease and you may have cause to sue them for any losses you sustain as a result. For example, if you lose out on a subtenant and, accordingly, the rent they would have paid, your landlord may be ordered to make good those losses.
Are there any alternatives to subletting?
There are several alternatives to subletting that can help tenants tied into a commercial lease. They include the following:
When you assign your lease to a third party, you essentially hand over the reins to them and relinquish your rights over the premises. However, your landlord may require that you enter into an ‘Authorised Guarantee Agreement’, or AGA as a condition of their consenting to the assignment. Under an AGA, you guarantee your successor’s performance of all the obligations under the lease.
- Licence to Occupy
A licence to occupy permits a third party to occupy the premises on a non-exclusive basis. You may be precluded from offering a licence to occupy by the terms of your lease, or your landlord’s consent may be required.
- End the lease
Commercial leases can be ended in three main ways: By exercising a break clause, surrendering the lease or waiting until it ends. The final option is clearly a matter of waiting it out and is often the best option if the lease term is due to expire soon.
Some commercial leases contain break clauses that enable the parties to end the lease early. If your lease contains a break clause, you must adhere to the requirements contained in the lease regarding matters such as the form, content and service of the notice. If you don’t, your break notice may be invalid.
You can only surrender your lease if your landlord agrees. The likelihood of them doing so will depend on various factors, including the state of the rental market and their likelihood of finding a new tenant.
Subletting can offer a lifeline to businesses tied into long commercial leases with no other readily available way of extricating themselves from the arrangement. By subleasing the premises or a part of them to a third party, you can reduce your overheads, improve cash flow and make use of property you no longer require.
However, an essential element of subletting is that you remain on the hook for your obligations under the head lease, including paying rent. The landlord can hold you responsible for issues caused by your subtenant, such as damage to the property. Therefore, choosing a trustworthy subtenant is crucial.
Further, your landlord’s consent will likely be required to any proposed sublease. With a bit of luck, your landlord will accept that subletting the premises is the best commercial solution all-round, reducing the likelihood of you falling into arrears and avoiding the premises being left vacant. However, if they drag their heels or unreasonably refuse to consent, you may have no option but to seek the Court’s assistance or consider alternative courses of action.
This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2024.