Underletting or subletting commercial property

With subletting and underletting a tenant leases part or all of the premises to another party. Subletting and underletting can provide a solution to excess space, financial strain, or changes in business circumstances. For landlords, risks of sub or underletting should be carefully managed.

Subletting usually means the tenant rents out part of the premises (e.g. a room or section) to someone else while they continue to occupy the rest. Underletting typically refers to renting out the whole premises to another party. In both cases, the original tenant remains responsible to the landlord under the main lease, but the distinction mainly lies in whether part or all of the property is being let out.

Landlord’s approval generally needed

In most commercial leases, tenants are required to obtain the landlord’s consent before subletting or underletting part or all of the premises. The lease typically stipulates that consent cannot be unreasonably withheld, meaning the landlord must have a valid reason for refusing the request.

The tenant is obligated to seek permission formally, and any subletting arrangement must be approved by the landlord in writing. A landlord may refuse consent if the proposed subtenant has questionable financial stability, poses a reputational risk, or plans to use the space for purposes not allowed under the head lease.

The landlord will generally charge the tenant administrative fees for reviewing the subletting or underletting request. These fees are typically for the landlord’s costs incurred in references, financial records, and proof of the subtenant’s ability to meet their obligations, including rent payments and maintenance responsibilities and also, if consent is given, for lawyers reviewing the proposed sublease and ensuring that the terms comply with the head lease.

A landlord has the right to impose conditions on the consent to sublet or underlet. These conditions might include requiring additional security or guarantees, restricting the type of business that can operate within the property, or ensuring that the rental terms align with the head lease.

Landlord’s risks with sub-lease or underlease

• Ensure consistent terms with the Head Lease - the landlord must ensure that any subletting or underletting arrangement is compatible with the head lease’s terms. This includes confirming that the subtenant’s use of the property aligns with the permitted use clause and that the terms of the sublease do not contradict the head lease’s obligations.

• Loss of control - once a tenant sublets or underlets part of the property, the landlord loses some degree of control over how the space is used. If the subtenant's activities are not in line with the property’s intended use, this could lead to disturbances, property damage, or conflicts with other tenants.

• Property damage - subtenants may not treat the property with the same care as the original tenant. This can lead to property damage, excessive wear and tear, or alterations that are not authorised by the head lease. Landlords may be concerned about the maintenance of the property and ensuring that the subtenant adheres to the repair and maintenance responsibilities outlined in the lease.

• Informal or unlawful arrangements - if the tenant enters into an informal subletting agreement without obtaining the landlord’s consent, it may breach the head lease and leave the landlord with legal recourse to evict the tenant. Unlawful or unapproved subletting can lead to significant legal challenges for the landlord.

• Impact on property value - the landlord should also consider whether subletting or underletting will affect the long-term value or attractiveness of the property. The use of the space by a subtenant could either enhance or diminish the property’s appeal, depending on the business type, the nature of the sublease, and the subtenant’s reputation.

• Complications with legal and eviction procedures - if the tenant or subtenant are in breach (e.g., through non-payment of rent or violation of lease terms), the landlord may face a complex eviction process. If the tenant has sublet or underlet the property, the landlord can face additional complications in recovering possession or enforce lease obligations.

Alternatives to subletting and underletting

• Assignment of the lease.

• Licence to occupy - a temporary arrangement where the tenant grants a third party the right to occupy part of the premises without the formal rights or responsibilities of a lease.

• Negotiating rent reductions or rent free periods - tenants may also negotiate directly with the landlord for financial relief, such as a rent reduction or a rent-free period, instead of pursuing subletting.

• Early termination of the lease - in some cases, tenants may seek an early exit from the lease, particularly if they no longer need the space or wish to relocate.

We can help

Whether you're a landlord seeking to protect your property rights, a tenant looking to sublet or underlet part of your space, or a business requiring flexible premises solutions, our experienced property lawyers provide practical, commercially-focused advice to achieve your objectives. We advise and have a lot of experience in :-

• Drafting and reviewing sublease or underlease agreements tailored to your specific needs

• Advising on consent requirements and navigating landlord approvals

• Conducting due diligence on potential sub or under tenants

• Resolving disputes that arise during subletting or underletting

• Ensuring compliance with relevant property legislation and regulations