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Tuesday, 1 March 2011

How To Sublet Your Premises – Can You Do It? Can Your Landlord Stop You? How Do You Do It?



Why sublet?

You are a tenant with too much space, perhaps because of the recession.

You don’t have a break clause in your lease, or you’ve missed it and the lease stretches ahead for a long time.

You want to get out of the premises altogether, but you cannot find anyone to take an assignment of your lease who will be acceptable to your landlord or who passes the assignment tests set out in your lease.

Or you just want to offload your surplus space, but stay in the remainder of it.

Solution?

Consider subletting either all or part of your premises.

Is subletting allowed?

First check your lease carefully. Subletting will usually be dealt with in a specific clause, sometimes called “alienation” or “dealings”.

If your lease doesn’t say anything at all about subletting, then it is allowed and your landlord’s consent is not required.  However, check if there is a covenant against “parting with possession”, as that would also prevent subletting.

If there is an absolute ban on subletting, you will only be able to sublet if your landlord agrees.  Where there is an absolute ban, your landlord has an absolute discretion, doesn’t have to be reasonable, and can impose any conditions it wants.

Can you sublet the whole of your premises?

Most commercial leases will allow subletting of the whole premises.

However, they usually provide that you first have to get your landlord’s written consent to do so.

Your lease will usually go on to say that your landlord’s consent must not be unreasonably withheld, but even if it doesn’t, if your lease says your landlord’s consent must be obtained, the law implies that that consent cannot be unreasonably withheld.

The consent process will usually involve you entering into a formal licence to sublet (often called a “licence to underlet”) with your landlord.

It is quite common for leases to specify that any sublease must be excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 (1954 Act), sometimes called “contracting out”, so that your subtenant will not get rights to renew its sublease at the end of the term. This is a sensible precaution for a landlord as it avoids the possibility of your subtenant renewing its sublease at the end of the term and becoming a direct tenant of your landlord where you have not renewed your own lease.

Contracting out is a straightforward process.

Can you sublet only part of your premises?

This can be more difficult.

If your lease prohibits subletting of part, then the answer is no, unless you can persuade your landlord to vary the lease and allow it, which is bound to come at a price.

If your lease says you can sublet part, again it will most probably require that you first get your landlord’s written consent (and the comments made above on this apply equally here).

It is more likely with subletting of part that your lease will require the sublease to be contracted out.

You will also have to agree with your subtenant what the rent for the sublet space will be, as it will be a portion of the rent you are paying. I make some further comments on rent below.

What about just sharing your premises?

Normally leases don’t allow sharing, but it might be an option for you if you are part of a corporate group and your lease says you can share your premises with other members of your group.

Group sharing provisions normally don’t require you to get your landlord’s consent, but that you just keep your landlord informed in writing.

What rent must be paid under the sublease?

This has been a controversial issue over the years. Commercial leases used to say that the rent payable under a sublease must not be less than the rent payable under the lease, sometimes called the “passing” rent.

There are still many leases in existence that say just that, and if yours does then in the sublease you have to set a rent equal to the passing rent, or a proper proportion of it in a sublease of part.

It can be difficult to find a subtenant willing to pay that much in a market where rents have fallen since your rent was set or reviewed under your lease. There may be ways round this, and various devices have been tried over the years (some of which have been ruled unlawful) but that is outside the scope of this post. [ See now my later post Subletting in a Falling Market - How to Escape the Passing Rent Trap.]

It is more common in newer leases to find instead a requirement that the rent payable under the sublease must be not less than the “open market” rent for the sublet premises, rather than the passing rent.

If that is what your lease says, then it will be more helpful to you in a falling market as it allows you to agree with your subtenant a rent less than the rent you are paying but one which is nevertheless a market rent for the time.

Of course, that leaves you having to pay the shortfall to your landlord out of your own money. But it’s better than nothing!

When is it reasonable for your landlord say no, you can’t sublet?

The law doesn’t allow your landlord to set out in your lease what will or will not be a reasonable ground for your landlord to refuse consent to sublet. This is different from assignments, where your landlord can specify tests that must first be satisfied before an assignment takes place.

Your landlord will still have you, the tenant, on the hook as a direct covenant if things go wrong, and so the financial status of the subtenant should be less of a concern to your landlord than the financial status of an assignee would be.

If you are in financial difficulty, it might even improve your landlord’s position if it has a subtenant. For example, if you were ever in arrears with your rent, Section 6 of the Law of Distress Amendment Act 1908 allows your landlord to serve notice on your subtenant requiring it to pay all future and outstanding rent direct to your landlord until those arrears have been paid in full.

However, if the covenant strength of your proposed subtenant is poor then, although this is less significant than on an assignment, it might still be reasonable for your landlord to refuse consent on this ground.

If your landlord has reasonable grounds for thinking your subtenant will commit substantial breaches of covenant, then this might entitle your landlord to say no, but this has not been tested in the courts.

Your landlord might also be entitled to say no if rent to be paid by your subtenant does not satisfy the relevant lease requirements as explained above.

What can and what must your landlord do when you apply for consent to sublet?

Where your lease allows you to sublet, subject to getting your landlord’s consent, the Landlord and Tenant Act 1988 (the 1988 Act) imposes obligations on your landlord:-

·         To respond within a reasonable time
·         To give its decision in writing
·         To consent unless it is reasonable not to do so
·         Not to impose unreasonable conditions
·         To specify any conditions subject to which consent is given
·         Where consent is refused, to give the reasons
·         To pass on the application to anyone else (e.g. a superior landlord) whose consent is required.

It is for your landlord to show that it has acted reasonably.  If consent is withheld or delayed unreasonably, you as tenant (but not your subtenant) have a statutory claim for damages.

Generally as a rule of thumb your landlord ought to respond to your request to sublet within 28 days, however this is not a statutory period and circumstances may mean that this is an unreasonably long time for your landlord to take.

Can your landlord demand a solicitor’s undertaking to have its costs paid before doing anything?

It is usually reasonable for a landlord (or its legal advisor) to ask for an undertaking for its reasonable costs to be paid. However, your landlord or its advisors should not postpone dealing with your application while waiting for the undertaking.  Any delay might mean your landlord is in breach of its obligation to respond promptly under the 1988 Act.

Can your landlord demand payment for its consent to sublet?

Other than reasonable legal and other fees, your landlord cannot normally demand a payment for consent to sublet.  The two exceptions are:-

·         If there is a ban on subletting in the lease, in which case your landlord has an absolute discretion whether to allow it and can name its price; or
·         If your lease excludes section 144 Law of Property Act 1925 (but that’s rare).

What should the sublease say?

If you are subletting the whole of your premises, the sublease will simply pass on all your obligations under your lease to your subtenant (except payment of rent, which will be specific to the sublease).

Subletting part of your premises is more complicated because your advisor cannot simply replicate the obligations under your lease but will have to adapt them to the area being sublet.

Your advisor will also have to create rights for your subtenant over the space you are keeping (eg access), and corresponding rights for you over the sublet space.

A plan will be attached to the sublease clearly showing the sublet space and the space you are keeping. If the sublease is for 7 years or more then it must be registered at the Land Registry and the plan will have to satisfy the Land Registry’s strict requirements.

In subleases of whole or part, the term of the sublease (how long it lasts) must not be the same length as or longer than the term of your lease. If you want the sublease to last for the remainder of your own lease term, you will have to ensure it ends at least a couple of days before your own lease ends.

Anything else you should think about?

Remember, even if you have granted a sublease of all your premises, you are still the one who is directly responsible to your landlord for the performance of your lease obligations. You therefore have to make sure your subtenant abides by the terms of its sublease.

You might want to try and secure a rent deposit or guarantee from your subtenant to give you more protection.

The above is only a general outline. You should always take professional advice when you want to sublet.

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