In Short
- Subletting in a commercial lease involves leasing part or all of the premises to another business, creating a new lease agreement.
- Lease agreements often contain restrictions on subletting, which must be followed to avoid breaching the contract.
- Landlords may impose specific provisions in the sublease, such as rent levels or rent reviews.
Tips for Businesses
Before subletting commercial premises, review your lease for restrictions and ensure compliance with all terms. If your lease allows subletting, check for any required consent from your landlord and be prepared for potential additional costs. Always seek legal advice to ensure your sublease is legally binding and meets all necessary conditions.
As a tenant under a commercial lease, you should be familiar with all the terms of this lease – particularly any limits on how you can use the property. The lease will usually restrict your use to a specific type of business, and may, for example, prohibit you from causing a nuisance.
Your lease may also restrict your ability to have third parties use the property in different ways. Alternatively, this may be permitted provided that certain conditions are fulfilled.
Depending on your circumstances, you may be looking to sublet part of, or the whole of, your premises. Commercial tenants must know what the lease permits, which helps tenants abide by the lease terms.
This article explains key points about subletting in a commercial lease.
This cheatsheet includes practical tips to understand key clauses and avoid disputes in leasing agreements.
What is a Commercial Lease?
A commercial lease is an agreement between a freeholder or leaseholder of a property and a tenant for the tenant to exclusively occupy the property for a fixed term. The actual lease will set out all the terms of such obligations, particularly each party’s rights and obligations. It will cover the majority of situations that can arise during a business’ use of the property. The landlord will also want to safeguard their property from the usual risks that can arise from a tenant’s occupation.
This can include third-party occupation of the property, including through a sublease. The landlord will be concerned with the subtenant’s financial standing and their ability to comply with all obligations under the original tenant’s lease. They will want to ensure that any ‘covenant’ from the original tenant (a promise to comply with certain terms) is also observed by the subtenant. This is particularly relevant where the subtenant is responsible for the entire property.
On the other hand, a tenant may want to ensure that subletting is permitted and will need to be familiar with any conditions attached to it. If the tenant’s business grows or they encounter financial difficulties, subletting can allow them to move to bigger/smaller premises as needed.
What is Subletting?
Subletting is a form of alienation of the commercial lease, as is, for example, lease assignment, and it is a lease that sits under another lease (the head lease). For example, subletting may occur when a commercial tenant has a lease covering five separate offices and they wish to sublease one.
Let us explore some key points to note about subletting in a commercial lease.
1. Sub-lease
If a tenant sublets their business premises, they must create a sublease, also known as an underlease. The sublease is a new lease agreement for the commercial space. It will have a lease term that cannot exceed the existing lease term. Therefore, if the lease term end date is 31 December 2025, the sub-lease end term date can be any time before this date, and the head lease may specify the exact number of days prior, which is normally 2-3 days before the expiry of the head lease term.
When a commercial tenant creates a sublease or underlease, they become the landlord of the subtenant, to whom they lease part or all of their commercial premises. However, the tenant remains the commercial tenant for the property, and the landlord remains their commercial landlord under the headlease.
2. Restrictions
There is no statutory law specifically restricting subletting. Instead, any restriction regarding whether a commercial tenant can sublet will be in the lease agreement. If there are none (which is unlikely), the sublet can occur, and the sub-tenant could also sublease. The sublease they create would be a sub-underlease.
Furthermore, if a commercial lease is silent on subletting, the commercial tenant will not even need their landlord’s consent.
In reality, a commercial lease will either entirely prohibit subletting or allow it with restrictions, as outlined in the lease agreement. A commercial tenant must comply with these. Therefore, they must either refrain from subletting or follow the rules when doing so. If a tenant fails to do this, any sublease they create may not be binding on the landlord, but it will be a breach of their lease, which can entitle the landlord to terminate the lease.
Equally, a landlord must comply with the lease agreement. For example, the lease may say that any consent ‘may not be unreasonably withheld or delayed’. In this case, the landlord cannot withhold consent without a reasonable reason, and such a refusal should take a reasonable amount of time.
3. Covenants
If a commercial tenant sublets their business premises with their landlord’s consent, the latter may request that the sublease have specific provisions. These may include obligations that the landlord themselves can enforce; however, this will not mean the tenant can avoid responsibility for their own subtenant.
There are other provisions the sub-lease may contain, such as:
- a specific level of rent (usually a market rent);
- if the sub-lease will have rent reviews and how often; and
- any security of tenure for the sublease.
Key Takeaways
In a commercial lease, the lease agreement will include rules on subletting. Subletting or underleasing is where a commercial tenant lets another business lease part or all of their commercial premises. A lease agreement will say if they can do this and any rules around it.
There are three key points to note about subletting in a UK commercial lease. First, when a tenant decides to sublet, they create a sublease. Second, a commercial lease agreement will likely contain restrictions on subletting, which may prohibit it entirely or impose rules. Finally, when a tenant makes a sublease or underlease, the landlord may require specific provisions to enforce directly against the subtenant.
If you need help understanding plans about subleasing in a commercial lease, our 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.
Frequently Asked Questions
Subletting occurs when a commercial tenant leases part or all of their premises to another business, creating a new lease agreement known as a sublease. The sublease cannot exceed the term of the original lease, and the tenant remains responsible for the property under the head lease.
Subletting is subject to the terms of the commercial lease. The lease may either prohibit subletting or allow it, subject to conditions. If the lease is silent on the matter, subletting may be permitted, but it is essential to follow the lease’s restrictions to avoid breaching the agreement.
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