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23 April 2014

Subletting and older leases

Steps taken by commercial tenants to counter today's trading conditions often result in surplus space at their premises, which they want to sub-let. Where a tenant wants to sub-let, both the head landlord and the tenant will want the sub-tenant's obligations in the sub-lease to mirror the tenant's own obligations to the head landlord under the head lease. This will help maintain the value of the premises and means that any costs the tenant has to pay to the head landlord under its lease because of their sub-tenant's actions (or inactions) can be recovered from the sub-tenant.

However, if the head lease dates from before the credit crunch it is likely to contain terms that favour the landlord, as landlords had more negotiating power then than now. This can create barriers when trying to attract a prospective sub-tenant, on the same terms, in today's different economic climate.

It's vital for the tenant to spot these barriers before signing heads of terms with prospective sub-tenants, even if timescales are tight, as failure to do so may mean having to renegotiate terms with the sub-tenant later - and risk losing them in the process.

Points to check include:

  • Does the head lease completely prohibit subletting or, as most do, require the landlord's consent to any sublease (which cannot be unreasonably withheld)? If so, the landlord may try to refuse consent if the terms of the sub-lease do not mirror those of the head-lease.
  • Does any sub-lease have to provide security to the sub-tenant under landlord and tenant law, or can that security be excluded?
  • Does the head lease impose full repairing obligations on the tenant? Sub-tenants will want only limited repairing obligations, but this may be unacceptable to the head landlord.
  • Does the head lease stop the tenant from subletting except on terms that the sub-lease provides for rent reviews at the same times, and on the same terms, as the head lease? Many older leases will provide for upward only rent reviews, which will not be acceptable to a prospective sub-tenant – especially if the sub-lease is for a relatively short term.
  • Does the head lease impose restrictions on alterations without landlord consent, which could stop sub-tenants from being able to make changes they want to the premises? If so, the sub-tenant is likely to make the sub-letting conditional on that consent being given.
  • Similarly, copying the terms in the head lease may mean a sub-tenant cannot sub-let in turn to further sub-tenants, or require consent if it wants to. Either may be a deal breaker to a prospective sub-tenant.

If a sub-tenant is unhappy at being asked to match the obligations that the tenant owes to the head landlord, the tenant may ask the head landlord to vary its lease, but this can be time-consuming, and prospective sub-tenants usually want to move fast. And few landlords will be prepared to vary terms favourable to them.

If a variation is not possible, there can be a danger that the landlord refuses to consent to the sublease if there is a mismatch between its terms and those of the head lease.

Specialist professional advice is strongly recommended for any proposed subletting of commercial property, for more information and advice please contact Gillian Price by calling 01753 279001 or at comproperty@bpcollins.co.uk

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