Is Subleasing Reckless?
Are you strapped for cash? Unable to afford your rent? Have you taken on more leasing space than you need?
Subleasing may be just what the doctor ordered. And yes, there are ways to make it work. While subleases occur much less frequently in practice than direct leases from the owner of the freehold, do not underestimate the commercial benefits of subleases.
The power to sublet arises out of the lessee's interest under the lease and general law. As a starting point, ensure that there is no prohibition in the lease to sublet in respect of the whole or part of leased premises.
Usually the lease stipulates conditions on which a lessee may grant a sublease. Assuming this, there are three main situations in which a sublease may be commercially attractive for a lessee:
- Recoupment of rent – when a lessee's need to use whole or part of the leased premises ceases, either temporarily or permanently, the whole or parts of the premises may be sublet. This enables a lessee to recoup some of the rent from a sublessee. However, remember that the principal responsibilities established in the lease towards the lessor for compliance with the provisions of the lease remain with the lessee.
- Profit making – occasionally a lessee is required (or agrees) to take premises which are physically larger than lessee's actual requirements, with the intention of granting subleases over the unrequired parts of the premises, usually at a profit. Subletting the parts that are not required also allows a lessee some flexibility in the future as its need for space changes. It may also allow a lessee to introduce sublessees whose businesses complement the lessee's business, allowing referral of clients by the lessee to sublessees and vice versa, which together satisfy a broader range of needs for those clients. This mutual commercial benefit for a lessee and sublessee is an attractive uplift that may occur in professional, retail or industrial uses of premises.
- Alternative to an assignment – in circumstances where a lessee wishes to be relieved of whole or part of the premises because it intends to:
a. discontinue its business; or
b. alter the nature or scope of its business; or
an assignment of the lease may be a better option than a sublease.
However, due to the nature and size of the premises, the duration and conditions of the lease or a lack of demand for such premises, assignment may not be possible to achieve. One or more subleases, even for much shorter terms than the balance of the lease term, is a more palatable option than vacating the premises and continuing to pay the full rent. Furthermore, leaving the premises vacant is often contrary to some covenants in the lease.
Our property team has all the answers to your leasing and property issues and we look forward to helping you. Please contact us.
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