Sub-Leasing Commercial Property: A Guide

What is Sub-Leasing?

Sub-leasing occurs when a tenant (Lessee), who has a lease agreement with a landlord (Lessor), rents out or allows the use of all or part of that property to another party (Sub-Lessee). The lease between the landlord and tenant is referred to as the headlease, and the lease between the tenant and their sub-lessee is a sub-lease.

What are the Benefits of Sub-Leasing?

Sub-leasing commercial property can be a beneficial strategy for tenants who find themselves underutilising space or facing financial challenges. The sub-tenant may benefit from being able to occupy space they may not otherwise be able to source or afford.

What are the Risks of Sub-Leasing?

There are a number of inherent risks involved for the Lessor, Lessee and Sub-Lessee:

• The Lessor has the danger of damage or additional wear and tear to the property from a party they may not have a direct agreement with.
• The Lessee may open themselves up to liability for actions or inactions by the Sub-Lessee. The original tenant remains responsible for rental payment, makegood, and any violations of the headlease terms. There may also be less security (eg. cash bond and guarantees) held by the Lessee over the Sub-Lessee which lowers the protection for the performance of the covenant compared to a standard landlord/tenant relationship.
• The Sub-Lessee has an increased risk as they will most likely not be aware of breaches of the headlease by the Lessee. This means the sub-tenant could be locked out without notice. Sub-Lessees may not have the same rights as the original Tenant such as an option to renew the lease, and may not know other crucial terms of the headlease which could ultimately affect them.

Sub-leasing commercial property could also introduce risks regarding insurance, public liability, security of stored goods and valuables, and potential difficulty in attributing costs such as electricity and water.

Can I Sub-Lease My Commercial Property?

Standard practice is for a standard condition to be contained in the commercial property lease that will outline how sub-leasing is to be handled. This usually states whether the tenant can or cannot sub-lease the property, and whether the landlord needs to provide permission or if they can decline the request.

The Sub-Leasing Process

In general, the following process should be enacted:

1. Consider The Risks: The tenant, landlord, and sub-tenant should consider the advantages and risks before requesting or committing to a sub-lease.
2. Review The Lease: Parties should review the headlease to ensure a potential sub-lease complies.
3. Obtain Landlord Approval: The tenant or their appointed real estate agent should seek explicit permission from the landlord before seeking or approving a sub-tenant.
4. Draft a Sublease Agreement: A legally binding sublease agreement is typically produced by the landlord or the tenant’s solicitor that outlines the terms and conditions between the tenant and the sub-tenant.
5. Notify the Landlord: Provide your landlord with a copy of the sublease agreement noting the final version may need to be formally agreed to by the landlord. Access should not be granted to the incoming tenant until this has been completed.

What if I Sub-Lease Without Landlord Approval?

Tenants that choose to either formally or informally sub-lease or allow another party to utilise part or all of the a property they lease, then the tenant risks breach and potential termination of the lease. This may open up legal liability for the tenant and potential damages payable to the landlord for damage to the property or non-performance of the lease terms. In short, don’t do it – maintain a good relationship with your landlord and communicate either directly or via the real estate agent or property manager.

Should I Utilise a Real Estate Agent for Sub-Leasing?

Sub-leasing commercial property can be a complicated process. You do not know what you do not know, so if a landlord or tenant mishandles a sub-lease their could be dramatic ramifications.

Crew Commercial agents and property managers are highly experienced in handling sub-lease arrangements. A sub-lease involves handling negotiations between three parties rather than the standard landlord and tenant relationship, plus multiple solicitors and different legal documents. All parties can benefit from a commercial real estate agent or property manager who is experienced in such matters so potential pitfalls can be avoided.

What Alternatives Are There To Sub-Leasing?

There may be alternative options that could assist the parties involved in a lease that may no longer suit the circumstances, such as:

• Lease assignment: Transferring the current lease to a new tenant. This has the advantage of releasing the current tenant from their obligations;
• Lease termination: The landlord may agree to release the tenant from the lease. This could involve having a commercial real estate agent source a new tenant to agree with the landlord on new terms with the current tenant to be released. Alternatively the landlord may agree to terminate the lease at a negotiated financial penalty.

Conclusion

Sub-leasing commercial property can be a viable option for tenants seeking to lower their rental exposure or utilse unused area. However, it is essential to understand the legal implications and potential risks.

We invite you to contact our commercial property experts at Crew Commercial should you like further assistance.

The information in this article is a guide for those interested in commercial property. We encourage parties to read the wording of their lease, conduct their own research, and seek independent legal advice should you need to make decisions relating to items discussed.

© Crew Commercial Property Pty Ltd. Author: Josh Wright.