Subletting your commercial property is a great way to reduce the overall running costs of your business. If you are a tenant in a commercial property it may be possible for you to lease out a portion of your rental premises to a third party.
Before you choose to engage in a commercial sublease it is important that you understand exactly what your rights and responsibilities are, so that you can make a balanced assessment of whether subletting is right for you.
If you are looking to sublease your entire property before the end of your lease, this is usually done via an assignment and carries with it different obligations. For the purposes of this article we will be focusing on subletting an area of your leased premises to a third party.
It is important to seek legal advice on commercial subletting. When you have comprehensive legal advice you can ensure that your subleasing experience is positive and beneficial for all parties.
Key terms and phrases
When you have a lease between two parties they are known as the landlord and tenant, or lessee.
When you engage in a sublease, the original lease becomes the head lease and the original landlord is known as the head landlord.
Under a sublease, you will become the head tenant and also a sublandlord, with the new third party tenant becoming a subtenant or sublessee.
What is a commercial sublease?
As a lessee of a premises you are engaged in a contract with a landlord. This contract gives you full rights to access and enjoyment of the designated property. You have clauses in your lease agreement which allow you to do or refrain from doing certain things under your lease. You may have an obligation to repair and keep the premises in good order, or refrain from creating noise or interference.
- A commercial sublease is a separate agreement between you and the third party to rent out a portion of your premises; the third party will become your tenant.
- Your original lease will remain in place, and you will be responsible to your landlord for all the requirements contained within your lease, including acts performed by the third party.
If you are permitted to sublease under your lease agreement, you will effectively become a landlord to the entity subleasing your property. You will need to seek consent of your landlord before engaging a third party in a commercial sublease.
Getting consent for your commercial sublease
When you are looking to engage another party in a commercial sublease you will need to secure the consent of your landlord. Many leases contain a clause that a landlord cannot unreasonably withhold their consent to a sublease. In some cases, a landlord may refuse to consent to a sublease; for example if there is evidence that the third party has financial viability issues.
- Check your lease and confirm that you have the right to sublet the property written into your contract.
- Identify any key conditions that may need to be satisfied as part of your sublease.
- Your sublease will be formalised by obtaining the landlord's consent in writing and engaging in a deed of consent.
- A deed of consent is a document which outlines the landlord's agreement to the sublease and any conditions.
It is important to protect your interests by when engaging in a sublease. That way you will be covered in the event of a dispute later on down the line.
Protect your interests
While it might be tempting to provide a sublease to an interested party who is willing to start paying rent as soon as they can, it pays to do your due diligence. You should ask for banking and credit checks to ensure that the third party will be able to pay rent and will comply with their financial obligations.
- If your sublessee defaults under their rental agreement you will still be liable to pay the entirety of the rent under the head lease.
- Ensure that the business being undertaken by your subtenant is in accordance with the terms permitted under the head lease.
It is worth engaging legal advice when drafting a sublease to make sure that your interest and rights are protected. A sublease will often contain a range of different provisions to your headlease, so it is important that you have considered every possible scenario and made allowances for it in your sublease.
Identify key terms and provisions for your sublease
You will need to identify how long you wish to sublet your property. This will depend on your professional requirements, but as a general rule any sublease should be one day less than the expiry of your headlease. If the headlease and the sublease expire on the same day it creates an assignment at law.
- Most leases will contain some form of a make good clause, which is a general requirement that the property be returned to its original state and the end of the lease.
- To protect your interests you should ensure your subtenant has a clear make good clause in their lease which aligns to the headlease so you are not responsible for rectifying their property after their lease expires.
You are entitled to request a security deposit or bank guarantee as a form of bond from your subtenant. This means that if your tenant is in breach you can access financial remedy for their breach.
Get legal advice on your commercial sublease today
A commercial sublease can be a highly beneficial undertaking which can provide a steady stream of income for your business. As with any commercial endeavour it is well worth seeking legal advice to protect your rights and interests.