Subleases: considerations before subletting
This article explains the issues and the law you should have in mind when you consider negotiating a sub-lease for your business.
Most commercial leases forbid subletting. There is a good reason for that. As soon as more than two parties are involved, agreement becomes more difficult and conflict more likely. Furthermore, the head landlord, who of course owns the property, is less able to enforce his rights.
Nonetheless, there are occasions when a sublease might be desirable. Before you consider subletting, you should carefully check your own head lease to make sure you are allowed to sub let. Even if the original lease prevents subletting, a sublease may be negotiated if all parties agree.
The most common use of a sublease is for letting an old building to many tenants. Likely, the property owner does not want to be involved and he is happy to take a modest rent for the whole building and allow his entrepreneurial tenant to sublet small parts at higher rents.
A good rule of thumb is that if the proposed sublease is of the whole of the premises, the landlord should always go for an assignment of the whole.
If the landlord is worried about the financial strength of the proposed new tenant, he is better off insisting on guarantees or simply refusing the assignment, than setting up a sublease and relying on his tenant to cover any problem.
Ducal estates, local authorities and some property companies retain the freehold of every property they buy. When they sell, they part only with a leasehold interest. They may sell land with a building on it, or maybe land ready for the tenant to build on it. So, while commercial leases tend to be from 5 to 25 years, a “long” lease is most likely to be for 99 or 125 years.
The owners do that partly because it is often profitable to do so, but more usually to retain control in the future. There is not enough space here to explain why, but the bottom line is that you can control exactly what is and is not done by a tenant more easily than you can for what is done by your buyer. So if you own nearby land, you have long term control of the development of a whole area.
The rent on a long lease might be a fixed sum, which becomes worth less with each passing year of inflation, or, more likely today, it will be reviewed every five years to something approaching the market rent.
A long lease has more in common with a freehold. It follows that subletting is allowed far more often. If the landlord of a long leasehold intends to allow subletting from the start, he will have set up the head lease so that he is happy for the property to be sublet without too much worry on his part as to what might happen in the future.
A lawyer will tell you that a sublease is “carved out” of the head lease. That is to say the original head lease remains intact and the sublease operates within it. The sublease can be for the whole of the property in the head lease or any part of it.
The document required for a sublease of “the whole” is simpler than one which covers only part. That is because you can largely rely in your document on the terms of the head lease so there is no need to define terms further. The sublease is controlled by reference to the terms of the head lease. What the document says, very simply is: “The new tenant is taking over but every term stays the same.”
The head landlord continues to get the deal he wants and the sublessor is safe, knowing that his own new tenant is liable to him in exactly the same way as he is liable to the head landlord.
The head landlord could reasonably be happy with his tenant and give consent to a sub-letting. After all, his tenant is bound to him whatever happens. But if he becomes concerned with the financial viability of his tenant, he may prefer to permit a sublease to a stronger subtenant than to say no and possibly push his tenant into administration and himself into a void period with no income at all.
The options for the head landlord cover a range, but must landlords take the view that they want to be able to take control or they do not. There is no point in being “just a little” more in control.
Dealing with a sublease gives the opportunity to all the parties to re-negotiate the terms. The tenant under the head lease may realise he has been taking advantage of loop holes in the head lease. He may wish to close them when he is subletting. Of course he cannot remove an obligation in the head lease without the agreement of the head landlord. (We do not advise changing any term in the head lease for the sake of the sublease).
If the sublease is for part of the property only, then there will certainly need to be provisions for shared parts, and common services, like parking, security or use of the reception area or meeting rooms.
If the lease has been properly drawn, the guarantor is on the hook for every liability of the tenant to the head lessor. So, if a sublease is created, the obligations of the original tenant remain unchanged. So the guarantor stays on the hook.
However, it may be part of the deal in the round that the new subtenant finds a new guarantor, and the old guarantor is released. For a subletting of all of the property, the release could be complete. If only part of the property is sublet, then the new guarantor would guarantee only the sub tenant’s obligations for that part.
The Net Lawman subleases provide an option relating to variations to the obligations of the guarantor.
The sublessor may decide to ask the new subtenant for a security deposit. If he has already lodged one with the head landlord, his obtaining one from the new subtenant in the same sum is a neat way to make sure he is covered for any liability under his own deposit agreement.
If the whole of the building is being let, it may be simpler to start afresh with a new lease between the head landlord and the new tenant instead of a sublease. There are obvious administrative advantages in the landlord dealing direct with proposed new occupier. But before you cancel a lease and draw a new one, consider stamp duty and registration costs. Both are payable on new leases and on subleases. The total cost will probably be the same on either route, but we advise you to do the calculations both ways, just in case the new lease route involves heavier payments.
We have other articles on business leases that are applicable to subleases. The best place to start is our introduction to leases and licenses.
We also have an article about assigning (transferring) a business lease to a new tenant.
Net Lawman sells two sublease templates. Because subleases deal with legal issues in the round, the form of sublease required for different types of property is not great. The main difference between our documents is in the degree of control to be exercised by the head landlord.
See our simple underlease for a straightforward sublet. If you need to release the original guarantor, or if the landlord wishes to have greater involvement in the lease, see our sublease for commercial property where the landlord has greater involvement.
Please note that the information provided on this page:
- Does not provide a complete or authoritative statement of the law;
- Does not constitute legal advice by Net Lawman;
- Does not create a contractual relationship;
- Does not form part of any other advice, whether paid or free.
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