Key Points About Subletting in a Commercial Lease

Summary

• Subletting in a commercial lease occurs when a tenant leases part or all of their premises to a subtenant, creating a sublease (also known as an underlease) that cannot exceed the term of the head lease, with the original tenant remaining liable to the landlord under the head lease whilst becoming the subtenant’s landlord.
• Commercial leases will either prohibit subletting entirely or permit it subject to conditions, and if the lease is silent on subletting, the tenant may sublet without landlord consent, but any breach of subletting restrictions entitles the landlord to terminate the lease and may render the sublease unenforceable against the landlord.
• Where subletting is permitted with landlord consent, the landlord may require specific provisions in the sublease including market rent, rent review mechanisms, and security of tenure arrangements, and cannot unreasonably withhold or delay consent where the lease expressly prevents this.
• This article is a guide to subletting in commercial leases for tenants in the UK, explaining what subletting involves, the restrictions that typically apply, and the key provisions that may be required in a sublease.
• LegalVision is a commercial law firm that specialises in advising clients on commercial leasing and property matters.

Tips for Businesses

Review your commercial lease carefully before subletting to identify any restrictions, consent requirements, and conditions that must be satisfied, as failure to comply can result in lease termination. Ensure any sublease is drafted with a term that expires before the head lease end date, typically two to three days prior as specified in the head lease. Seek landlord consent in writing before proceeding with any subletting arrangement, even where you believe consent cannot be unreasonably withheld, to create a clear record and avoid disputes.

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On this page

• What is a Commercial Lease?
• What is Subletting?
• What Are a Tenant’s Ongoing Obligations After Subletting?
• Key Takeaways
• Frequently Asked Questions

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.

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. 

What Are a Tenant’s Ongoing Obligations After Subletting?

Subletting does not release you from your obligations under the head lease. As the original tenant, you remain fully liable to your landlord for everything the head lease requires.

This means that if your subtenant:

• fails to pay rent;
• damages the property; or
• breaches any other term of the sublease,

you remain responsible to your landlord for those breaches. Your landlord can pursue you directly, regardless of whether the subtenant caused the problem. This is known as privity of contract. It is one of the most important practical risks of subletting that commercial tenants often overlook.

To protect yourself, you should ensure your sublease:

• mirrors the key obligations in the head lease;
• requires the subtenant to comply with all relevant covenants; and
• includes provisions allowing you to terminate the sublease if the subtenant breaches its terms.

You should also consider requiring the subtenant to provide a rent deposit or personal guarantee. This gives you financial protection if the subtenant defaults. Before subletting, review your head lease carefully to confirm all conditions for consent have been met. Failing to do so could put your entire lease at risk.

Cheatsheet for UK Leasing Terms

This cheatsheet includes practical tips to understand key clauses and avoid disputes in leasing agreements.

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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, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.

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