Sub-letting your commercial premises – what you should know

Do you hold a lease on a commercial premises?

Do you want to sub-let it?

Or assign (transfer) it to someone else?

You may run into difficulties with your landlord, though.

A well-worded lease should be pretty clear on whether tenants have the right to sub-let the premises or not.

The lease should explain exactly what permissions tenants have to reconfigure a property, sub-let in part or whole or run a different type of business from the premises.

By the same implication, it’ll also be quite clear about what tenants can’t do.

Let’s take a look at the issues.

Sub-letting and running sub-businesses

This is an issue that typically gets discussed when putting a lease in to place.

Most leases will have a restriction on transferring or sub-letting contained in the lease.

This is to allow the landlord to protect their investment by ensuring that the quality of the tenant is high.

That’s because any tenant can ultimately obtain security of tenure in the premises i.e. rights to stay in the property.

However, the landlord will also need to consider how restrictive the lease is, because if it is unduly restrictive it will have an adverse effect on the rent they can achieve.

Quite frankly, less tenants will be prepared to take it on if they think that they cannot assign or sub-let it in the future, if necessary.

Permitted user clause

This says what the premises can be used for…

It may be quite wide, or it could be quite restrictive depending on the building permissions or planning use classes.

If the tenant’s idea for a sub-business falls outside of this user clause then they wouldn’t be able to do it.

User clauses can also be quite specific, and landlords can use them to further reduce the ways in which a premises can be used by permitting use within a certain use class but going on to restrict the type of business even further.

Restrictions on Rights

All commercial leases will contain a restriction on the transfer or sub-letting of the premises without the landlord’s consent, and an absolute prohibition on letting part of the premises.

Put simply, the landlord is entitled to ensure the property is not handed over to an undesirable who will devalue the landlord’s property.

However, the landlord is not entitled to unreasonably withhold consent to certain rights.

The question of what is “reasonable” is a thorny one, though.

There is no statutory definition of a reasonable refusal, therefore it is a question of fact and circumstances in each particular case.

If a tenant is not happy with the landlord’s decision, they can go to Court to seek a declaration that the consent is being withheld unreasonably and allowing the assignment/sub-letting to go ahead without the consent.

Sub-letting provisions

These dictate whether the tenant will be allowed to sub-let the premises once they’re in the property and if they are, what are the conditions that the tenant needs to fulfil to be able to sub-let the premises.

There are other areas where parties can agree to build in more flexibility, for example by allowing tenants to share occupation of the premises with other group companies without the landlord’s consent (so long as they both comply with the user clauses).

Similarly, in retail leases, a tenant will request the ability to put in a limited number of concession stands without needing to get the landlord’s consent.

Sub-letting a part

Most modern commercial leases will prohibit partial transfer or sub-letting.

However, if a premises is to be sub-let the existing tenant will be the landlord for the sub-tenant, and they will be granting a sub-lease to the sub-tenant.

If sub-let, landlords may also want to consider crafting further rights and permissions around who will have access to the premises, security, keys and knowledge of alarms, etc.

When weighing up a tenant’s request to sublet a property, landlords should look at premises, the tenants involved and the length of the lease before deciding if they’re happy for the tenant to sublet.

If there’s a long lease and a reliable tenant, then that tenant would likely want the right to sublet.

Most landlords would be happy for them to do so, provided they know what’s happening, have the ability to consent to that subletting and can ensure their sub-tenant is suitable and will sign up to the covenants in the lease.

So, for landlords, it’s a case of weighing up whether they will allow it, whether they’re willing to allow the tenant to sub-let the whole of the premises or individual parts and then making sure they have controls in the lease to maintain a say over who they have occupying the premises.

It needs thinking about in advance, and lease provisions set up to strike the right balance that provides the landlord control and a say over what happens in their property vs. the tenant’s need for flexibility and to manage their space as they see fit.

The head landlord’s position is not affected from a legal perspective as he will still have his original tenant on the hook as that tenant will remain contractually liable to the landlord

Break Clauses

Tenants should look for a break clause in the lease.

This will allow for circumstances changing in the future.

Generally, the breaks clause would be exercisable at the time of the 1^st rent review, but this is entirely a matter for negotiation between the parties at the outset.

Most break clauses will only be exercisable when the tenant has complied with all provisions in the lease.

Transfer of Lease

The existing tenant must ensure appropriate references – trade and bank – are obtained and submitted to the landlord, along with the request for consent to transfer.

The existing tenant will also have to be released from their personal guarantee, if they have given one.

Service charges, and any other annual charges, will have to be apportioned between the new and existing tenant.

The landlord will be anxious to ensure that the new tenant is as satisfactory as the existing one.

Conclusion

Hopefully, you will see from the above that entering into a lease can be a complex matter which should not be undertaken without professional advice.

Quite frankly, it is easy to sign on the dotted line of a commercial agreement.

Especially when you are starting a new business about which you are understandably excited.

But it is foolish to do so when you run the risk of running into costly difficulties later on and find that you cannot assign or sub-let or you are staring at an eye watering rent increase through the rent review.