How does a sub-lease work?

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With more employees working from home than ever before, business owners are beginning to assess whether they are making effective use of their leased premises. For businesses finding they now have a little too much space on their hands, a sub-lease arrangement can give commercial tenants the ability to recover rental and other associated costs for part or all of their leased premises.

But just what is a sub-lease and what do you need consider before you invite someone else into your tenancy?

What is a sub-lease?

A sub-lease arrangement allows the original tenant (the head tenant) to lease some or all of the premises to a third party (the sub-tenant). The original lease is known as the Head Lease. The second lease, or sub-lease, is usually for a similar or shorter term than the period noted in the Head Lease.

It’s important to note that although a sub-lease arrangement is agreed between the head tenant and the sub-tenant, the head tenant remains directly liable to the landlord for all of its obligations under the Head Lease (including paying rent and outgoings).

Before you enter into a sub-lease…

  1. Check the Head Lease

Not all leases allow sub-leasing arrangements. You will need to check the terms of the Head Lease and see if consent can be given to set up a sub-lease, and if so, if there are any conditions that need to be satisfied before the landlord will grant consent.

  1. Do Due Diligence

The head tenant is ultimately responsible for meeting its primary obligations under the Head Lease. In other words, if the sub-tenant doesn’t pay the rent, the head tenant will still have to foot the bill. It is crucial that you investigate any proposed sub-tenant thoroughly to ensure that they can meet all the necessary payments under the sub-lease as they fall due.

You will also need to confirm how the sub-tenant intends to use the premises, as you will need to get consent from the landlord if sub-tenant’s proposed business use is different to how you are currently using the premises as head tenant.

  1. Record it in Writing

As with any legal arrangement, it is important that landlord consent is documented correctly to reduce the potential of a dispute occurring in future. A Deed of Sub-Lease, signed by both parties, is usually the best way to record a sub-leasing arrangement.

How can we help?

If you are a commercial tenant considering a sub-lease, we will be happy to help you review your existing lease terms and set up your sub-leasing arrangement. Please get in contact with our experienced, specialist commercial law team, or your usual trusted WRMK advisor, who will be happy to talk with you about your situation.

Our thanks to Dilshaan Mohanaraj for writing this article.