Subletting (also known as “underletting”) is something that most landlords and tenants of Commercial Property will come across at some point. Here Emma Chater, Partner in the Commercial Property team here at mfg, looks some of the key things to consider in the latest mfg Blog post.
What is a “sublease”?
A sublease is where you permit a third party to the use of the whole or part of the premises that you have taken a lease of. You remain the tenant under your lease (which becomes known as the “head lease” or “superior lease”) and you become a landlord to the third party who will move into the property and become the “subtenant”.
Why would you consider subletting?
Subletting offers a practical solution in various scenarios such as:-
- Where you have space in the premises that you have taken a lease of, but do not use;
- Where you are not actually in occupation of the property - for example you have found larger premises elsewhere and moved your business to the new premises, so the property is effectively standing dormant;
- Where your business might not be performing as well as you had hoped, and the rent is a payment that you could do without, but the landlord is not willing to negotiate a commercial surrender of your headlease.
What are the risks?
Subletting may seem like a good idea in order to get the property “off your books”. However, subletting is not always risk free. Some of the risks include:-
- Remaining liable for all of the terms under the headlease. This includes payment of the rent, and complying with the repair obligations at the end of the lease term.
- If the subtenant does not make their rent payments on time, or at all, you would have to cover them otherwise you would be in breach of your headlease.
- Similarly, if the subtenant moves out or goes bust and the property is in a significant state of disrepair, then you would be obliged under the terms of your headlease to put that property back into the condition that is required by the terms of the headlease, which could come at a significant cost if the headlease has a full repair obligation.
- The responsibilities and burdens associated with being a landlord being transferred to you. For example, there is a time and administrative cost in:
- - collecting rent;
- - ensuring that the tenant is complying with all of their obligations in the lease;
- - making sure that the tenant is paying for their outgoings, including utility bills and business rates so that you do not end up being responsible for the same.
Do I need landlord’s consent?
In most cases your landlord must agree to you subletting the premises. Most landlords will often impose strict conditions on any proposed subletting, or they may refuse to grant consent at all (acting reasonably).
For example, it might be reasonable if the subtenants proposed use of the premises does not fit with the landlords desired business mix, such as in a parade of shops where there are already several cafes.
If you are a tenant considering subletting your premises, or a landlord who has been approached by a tenant to sublet their premises, please do get in touch, and we would be very happy to discuss your options with you.
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