If you are a tenant in a commercial property, you may be able to sublease part of your property to a third party. This can be a good idea if your business is downsizing and you have more space, as it allows extra cash flow to help with the rent. If you decide to sublet your property, it is vital that you understand your obligations under your existing lease, as well as the obligations that a sublease would create. This article will define subletting and will set out five key tips to consider when subletting commercial property.
What is a Sublease?
A sublease occurs when a tenant rents part of the property they are leasing to a secondary tenant. In practice, the original tenant becomes a sublandlord, with the secondary tenant being a subtenant. This is because the subtenant is stepping into the shoes of a tenant, with the original tenant acting as the landlord to the subtenant.
The sublease is a separate agreement to the original lease you are in with your landlord. The original lease remains in effect, even with the new lease being signed. That original lease is referred to as the head lease, with the original landlord becoming the head landlord. It is important to note that you, as the sublandlord, are still ultimately responsible to the head landlord for your obligations under the head lease.
Subletting involves renting part of your property. If you wish to sublet the whole property, this becomes an assignment rather than a sublease. An assignment also requires the written consent of the landlord, however it involves different obligations.
1. Obtain the Head Landlord’s Consent
The first step in subletting involves obtaining the landlord’s consent. Here, you should check your lease to see if:
- you have the right to sublet the property; and
- there are any conditions that you need to satisfy when doing so.
Some leases will require you to provide the landlord with specific information about the subtenant for them to consent to the sublease. The landlord’s consent needs to be in writing.
Obtaining the landlord’s consent is a formal process. Often, the parties enter into a deed of consent that documents the landlord’s agreement as part of the process. If the landlord prepares the deed, having a lawyer review the document to ensure that it best protects your interests is beneficial.
Alternatively, you may be asked to prepare the deed. If this is the case, a lawyer can help you in the drafting process. A properly drafted deed is vital to ensuring that there will be no disputes down the track, especially concerning the landlord’s consent of the sublease.
2. Do Your Due Diligence on the Subtenant
Carefully choosing your subtenant is essential. Checking their bank and credit references will help you ensure that they:
- have the financial capacity to pay rent; and
- will comply with the financial obligations of the sublease.
If they are a new business, you can check their business plan. On the other hand, if they are an established business, you can look at their financial statements from the last few years.
It is important to remember that if the tenant is unable to pay their rent and defaults under the sublease, you will be:
- liable to pay the whole of the rent under the head lease; and
- held responsible for the failure to pay.
Furthermore, it is vital that the tenant runs a business that is consistent with the permitted use under your head lease. Additionally, if you are sharing the premises, thereby working close to one another, it is vital to ensure that you will be able to work alongside one another without any significant issues interfering.
3. Decide the Term of the Sublease
It is essential to think about how long you would like to sublease the property. Usually, this depends on your personal and professional circumstances. A short sublease gives you more flexibility, however it may be more challenging to attract subtenants.
As a rule of thumb, the length of a sublease should always be one day less than the expiry date of the head lease. If both leases expire on the same day, it will create an assignment of the lease at law. As this is not the intention of the parties, it is best practice to set the expiry date one day before the expiry date of the head lease, thereby creating a distinction between the sublease and head lease.
4. Ensure the Subtenant Is Responsible for the Make Good Obligation
Because the subtenant ultimately steps into your shoes as the tenant under the head lease, it is important that you do not remain liable for some things under the head lease.
At the end of the term, you will need to make good the property as per the obligations of the head lease. Given that you may not have direct control over the condition of the property that you are subletting, the responsibility for make good works should lie with the subtenant.
When drafting the sublease, it is best to insert a clause stating that the subtenant is responsible for all make good works under the head lease. This will help you ensure that the subtenant returns the property to you in the same way that you must return it to the head landlord.
5. Request a Security Deposit or Bank Guarantee
If you have provided a security deposit or bank guarantee under your head lease, it is best that you also request one from your subtenant. The value can be proportionate to the space they are subleasing.
Requesting a security deposit or bank guarantee means that if the subtenant breaches the sublease, you can call on the security money to remedy the breach.
If you are a tenant in a commercial property and have extra space or need assistance with cash flow, subletting part of your premises can be beneficial. Before attempting to sublet your property, ensure that your lease allows you to do this. Furthermore, you should:
- obtain your landlord’s written consent;
- do your due diligence on the subtenant;
- decide the term of the sublease;
- ensure the subtenant is responsible for the make good obligation; and
- request a security deposit or bank guarantee.
Having a lawyer draft a sublease will ensure the relevant obligations and liabilities you have under the head lease are passed on to the subtenant. If you have any questions, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.
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