Advantages and Disadvantages of Subletting in a Commercial Lease

A commercial lease is where a property owner allows a business owner to solely occupy their commercial property for a specific time, which is the lease term. In return, the business owner, as the tenant, pays rent to the landlord. Although the property will be their commercial premises for their business activity, the original tenant may decide to sublease to another business that becomes a new tenant.   

However, subletting will depend on the commercial lease agreement and the landlord. Before any decisions on subletting, it is crucial to take advice from a property lawyer. Your conveyancing solicitor will be able to explain the risks associated with this. This article will help by explaining subletting and its advantages and disadvantages. 

What is Subletting Under a Commercial Lease?

Subletting is when a commercial tenant subleases part or all of the commercial property they lease and, therefore, has sole possession of it. You may hear others refer to this as an underlease. Thus, although a commercial tenant usually has exclusive occupation of a property, when they sublet, they no longer do. 

A sublease is where a commercial tenant creates another lease for the commercial property. They become the landlord of this whilst remaining the tenant for the original lease, the head lease. The business that signs the lease becomes their sub-tenant.

A sublease can never be longer than the lease term of the head lease, nor does it require registration at the Land Registry. Below, we look at some advantages and disadvantages of subletting.

Advantages of Subletting Under a Commercial Lease

There are advantages for both commercial landlords and tenants in subletting. Subletting is advantageous for commercial tenants when they struggle to pay their rent. 

For example, subletting may be an option if their business is not doing well, but there is no option to use any break clause to end the commercial lease. The money a tenant receives for the rent of the sublease will help them pay the rent of the head lease they have legally committed to. This also proves advantageous to commercial landlords as they avoid facing the potential rent arrears they may otherwise encounter.

Also, subletting is advantageous if a tenant no longer needs to occupy the commercial property but still has to honour their commitment to the commercial lease. It means the commercial tenant can save money on rent for retail space they no longer need. This, in turn, is advantageous to the landlord as it means their commercial property is in occupation, as sometimes landlords have to show good occupancy levels. 

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A further advantage of a commercial tenant subletting is that they do not lose their interest in the commercial property. If a tenant alternatively assigns the commercial lease, they will no longer have an interest in it. Tenants may wish to retain their interest in the commercial building to occupy it later. 

Disadvantages of Subletting Under a Commercial Lease

Although there are advantages to commercial tenants and landlords in subletting, there are disadvantages too. For example, the commercial landlord must first agree to the sublease. If so, this could disadvantage the tenant as, in reality, subletting may not actually be an option.

Also, when commercial tenants sublease their business premises, they involve another party in the commercial lease process. This can be practicably difficult for both them and their commercial landlord. In addition, a landlord may find a sublease difficult as they effectively have less control over their commercial property because they will have to approach their tenant about any issues concerning the subtenant.

Furthermore, the commercial tenant starts to have an extra role in the commercial lease: collecting rent from their subtenant.

Key Takeaways

A sublease is where a commercial tenant lets another party occupy all or a part of the commercial premises. This article has sought to explain the advantages and disadvantages of subletting for commercial landlords and tenants. 

For example, it demonstrates that an advantage includes that it is a way for the commercial tenant to raise the rent when finances are tough. This also advantages the commercial landlord, who may otherwise face rent arrears. An example of a disadvantage of subletting is that there is a further party in the commercial lease process, which can cause complications. Also, both the commercial tenant and landlord sometimes have less control over the lease terms. 

If you need help understanding the advantages and disadvantages of subletting, LegalVision’s experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.