October 2013

Subleases - what you should know as a head-tenant

You (or your company) are a tenant of commercial or retail premises.  You are thinking of subleasing part of your premises. 

What are the main issues?

Under a sublease, you grant a lease of all or part of your premises to a new tenant.  You remain liable under your lease from the landlord, and continue to pay rent to your landlord and to otherwise deal directly with your landlord.  The subtenant pays rent to you and normally has no direct dealings with your landlord.

Although it is possible to sublease the whole of your premises, an assignment is usually preferred when the new tenant is to occupy the whole of the premises, unless there is a particular reason to use a sublease - for example if the new tenant is to pay a higher or lower rent than is payable under your lease.

Where the new tenant is to take over only part of your premises, this must be done by sublease rather than an assignment.

While it's usually possible to negotiate the release of personal guarantees and bank guarantees on an assignment, provided the new tenant gives equivalent guarantees to the landlord, existing personal guarantees and bank guarantees provided by you to your landlord will remain in force following a sublease.  You may of course require your subtenant to provide personal guarantee and/or a bank guarantee in your favour to secure the new tenant’s obligations under the sublease.

Landlord's consent

With a proposed sublease, the consent of the landlord is required.  Leases often provide that the landlord cannot unreasonably withhold its consent, but in some cases the landlord can withhold consent.

With subleases, the landlord may require that you and the new tenant enter into a deed with the landlord under which the new tenant agrees not to do anything which would cause you to be in breach of the headlease, and under which the new tenant acknowledges that if the headlease is terminated for any reason, the sublease also comes to an end at the same time.

Cover your headlease obligations

Subleases tend to be more complicated than assignments.  With assignments, the new tenant normally takes over all of your obligations under the existing lease.  With subleases, a new lease (sublease) is entered into between you and the new tenant which may have provisions in it which are different from those contained in the headlease.

With subleases, it is important to make sure that the obligations of the new tenant under the sublease cover all of your obligations to your landlord under the headlease, and also that there is nothing in the terms of the sublease which is inconsistent with the rights and obligations of the parties under the headlease.  For example, it will be important to ensure that the term and any option periods provided for in the sublease are consistent with your rights under the headlease, and that the obligations of the new tenant to make good the premises at the end of the sublease, and carry out any redecoration during the term of the sublease, are consistent with equivalent provisions in the headlease.

Retail Leases Act

If your lease is of retail premises covered by the Retail Leases Act, you will have to consider the provisions of that Act in relation to any sublease.  For example, you will have to provide a disclosure statement to the subtenant when the draft sublease is issued.  The landlord will expect its legal expenses of the matter to be reimbursed, but under the Act you are not permitted to seek any contribution to legal expenses from the subtenant.

Author: Jack Gordon