Commercial tenants with pre-recession leases who want to sublet can discover it's more difficult than they thought. Find out the problems with older leases - and how to overcome them
Head lease terms and the economic climate
Commercial tenants with surplus space in their premises may want to sublet. Where a tenant wants to sublet, both the head landlord and the tenant will want the subtenant's obligations in the sublease to mirror the tenant's own obligations under the head lease.
This helps maintain the premises' value, and means that any costs the tenant has to pay to the head landlord under its lease because of the sub tenant's actions (or inactions) can be recovered from the subtenant.
However, if the head lease dates from prior to the last recession, it is likely to contain terms that favour the landlord - because landlords had more negotiating power then. This can create barriers when trying to attract a prospective subtenant, on the same terms, in today's different economic climate.
It's vital for the tenant to identify these possible sticking points before negotiating with prospective subtenants. Failure to do so may mean losing the subtenant before heads of terms are signed - or having to make substantial concessions to keep them
Subletting - terms to check
- Does the head lease completely prohibit subletting, or (as most do) require the landlord's consent to any sublease? If so, the landlord may try to refuse consent if the sublease's terms do not mirror those of the head lease.
- Does any sublease have to provide security to the subtenant under landlord and tenant law, or can that security be excluded?
- Does the head lease impose full repairing obligations on the tenant? Subtenants will want only limited repairing obligations, but this may be unacceptable to the head landlord.
- Does the head lease state that any sublease must provide for rent reviews at the same times, and on the same terms, as the head lease? Many older leases will provide for upward-only rent reviews, which will not be acceptable to prospective subtenants - especially if the sublease is for a relatively short term.
- Does the head lease impose restrictions on alterations which could stop subtenants from being able to make changes they want to the premises?
- Does the head lease state that a subtenant cannot sublet in turn to further subtenants without the same obligations being passed on? This may be a deal breaker to a prospective subtenant.
Lease variations for subtenants
If a subtenant is unhappy at being asked to match the obligations that the tenant owes to the head landlord, the tenant may ask the head landlord to vary its lease - but this can be time-consuming, and prospective sub-tenants usually want to move fast. And few landlords will be prepared to vary terms favourable to them.
If a variation is not possible, there can be a danger that the landlord refuses to consent to the sublease if there is a mismatch between its terms and those of the head lease.
Specialist professional advice is strongly recommended for any proposed subletting of commercial property.