How to Sublet a Leased Commercial Property

Subletting or Underletting of a commercial property is when a Tenant of a property further rents out the property to another party called the Subtenant for a portion or the remainder of the duration of the Tenant's lease.

The Tenant of a commercial property refers to an individual, company or other business entity (e.g partnership, limited liability partnership) who rents the property from the Landlord/Owner of the property and occupies it for a specified time for the purpose of carrying on its business or other commercial purposes.

The Subtenant of a commercial property refers to an individual, company or other business entity (e.g partnership, limited liability partnership) who rents the property from the Tenant for a portion or remainder of the duration of the term of the Tenant's lease. The Subtenant occupies either the whole commercial property or only a portion of the commercial property for the purpose of carrying on its business or other commercial purposes.

Under a commercial lease agreement, there is usually a stipulation that the Tenant should not sublet or underlet the commercial property absolutely, or at least not without the express written consent of the Landlord. The reason for this is that the enforceability of an agreement becomes more difficult when more than two parties are involved. Additionally, the Landlord's rights may become less clear and the ability to enforce them becomes more difficult. This concern is not unfounded because the Tenant takes on the role of a Sublandlord in its relationship with the Subtenant and the lines may become blurred on to whom which obligations are owed. Similarly, where a Subtenant is unable to make rent payment which is ultimately remitted to the Landlord, the Landlord usually has to chase the Tenant for the rent, who in turn chases the Subtenant. This process is longwinded and it takes some time before the Landlord receives the money it is owed.

There are usually two separate agreements that are in force when sublet. These are: (1) The subsisting commercial lease agreement that is between the Landlord and the Tenant; and (2) The newly created sublease agreement between the Tenant (Sublandlord) and the Subtenant.

Nonetheless, subletting has certain advantages for all the parties involved and can prove to be useful in some situations.

1. Advantages of Subletting from Landlord's Perspective.

The Landlord is assured to get rent payment. Because there is a Subtenant, the Landlord is assured that the Tenant will be able to afford the rent payments, either through its own funds or through the rent paid by the Subtenant which flows upward to the Landlord ultimately.
Subletting maximises the use of the rental property and reduces or eliminates the existence of unused rental spaces. This is because the Subtenant may be using a portion of the property that is unused by the Tenant.
It is possible that the Subtenant can become the main Tenant later on. For example, where the term of the Tenant's lease ends and the Landlord is still interested in renting out the property, it can lease it to the Subtenant to become the main Tenant due to the existing relationship.

2. Advantages of Subletting from Tenant's Perspective.

The Tenant can still maintain its status as the occupant of the commercial property for an interim where the Tenant will not be directly using the property. For example, where the Tenant is looking to revamp its business and may not be physically using the commercial property, it can sublet it to another party to use it for the time being until it is ready to resume its occupation of the premises.
Where the Tenant has downsized its operation and cannot use a portion of the property, but doesn't want to renegotiate a new lease with the Landlord. For example, if the Tenant had originally leased two floors of the commercial property, but due to downsizing now intends to use only one floor; it can choose to sublet the floor which it is no longer using to a Subtenant for a specified time.
Where the Tenant is having financial problems with the payment of the rent and wishes to keep occupying the commercial property until its financial problems are resolved.

3. Advantages of Subletting from Subtenant's Perspective.

Because the subletting term is usually tied to the term of the Tenant's lease, subletting can be beneficial where the Subtenant is interested in a shorter termed arrangement instead of a more stringent long term lease.
If the Subtenant is a small business, it can sublet a portion of a commercial property instead of having to find a small property to lease from a Landlord.
The Subtenant can build rapport with the Landlord and possibly take over the lease of the property when the Tenant's term ends or if for any reason, the Tenant forfeits its lease.

4. Effective Subletting.

In order to minimise the concerns of subletting, and maximise the advantages, it is important to understand how to effectively sublet.

(a). Acquire the Landlord's written consent:

The first step to subletting properly is to get the landlord's written consent. While the landlord may verbally consent to the subletting, it is always important to have the landlord's consent written and in a documentary format often called the consent for the subleasing of commercial premises. The reason for this is so that all the parties involved (i.e. Landlord, Tenant and Subtenant) can know what the conditions for subletting are, what they are permitted to do and what will not be included in the Landlord's consent. The written consent of the Landlord should contain the conditions on which the Landlord is giving its consent and it should be signed by all the relevant parties.

The Landlord's consent will usually take the format of an agreement that is legally enforceable, containing terms and conditions that will be binding on the parties.

(b). Create a comprehensive subletting agreement:

Upon receiving the Landlord's written consent, it is important for the Tenant (Sublandlord) and the Subtenant to enter into a comprehensive subletting agreement. A comprehensive subletting agreement is one that is detailed and without ambiguity on matters which are relevant to the subletting. A detailed subletting agreement should contain the following details:

a description of the commercial property;
the term of the subletting;
the details of the original lease;
the rights and remedies that are available to the parties;
how rent is to be paid and what happens where rent is not paid.

A detailed subletting agreement should also be made subject to the original lease agreement. Where there is a detailed subletting agreement, the parties are fully aware of what is expected of them and how the Landlord's rights are protected in important situations. Landlords are usually wary of subletting because their rights become more difficult to enforce as the subletting agreement is between the Tenant (Sublandlord) and Subtenant. A comprehensive subletting agreement restores Landlords' confidence because it sets out areas where the Landlord's rights may be enforced even though it is not a party to the subletting agreement. For example, under a subletting agreement, a Landlord's right to receive may be protected by stipulating that if the Subtenant doesn't make a rent payment, the Tenant will become liable for the amount the Subtenant owes.

(c). Have an existing comprehensive lease agreement:

It is very important to have an original lease between the Landlord and the Tenant. This is because the original lease will be the primary source of the Landlord's rights and remedies and the Tenant's obligations so that when a subletting agreement is then created, it can be made subject to the original lease agreement. Additionally, the Subtenant's obligations in relation to the commercial property can be made to mirror the obligations of the Tenant in the original lease. For example, if under the original lease the Tenant is prohibited from making alterations to the property, the subletting agreement can also prohibit the Subtenant from making alterations to the whole or a portion of the property. This is beneficial to the Landlord because the property is used just as it is intended to be used. Similarly, the Tenant can control the Subtenant's actions so that it (the Subtenant) doesn't do anything that can ultimately lead to the Tenant's breach of the original lease and potential liability for damages. This is why it is important for the original lease to be as detailed as possible so that it can be referred to in areas where the subletting agreement is not clear, or even where the subletting agreement conflicts with the original lease.

Concluding thoughts

Overall, it is clear that subletting a commercial property can prove beneficial to all parties involved. Indeed the risks and concerns are valid, but when done properly it can bring relief to the Tenant, the Subtenant and even the Landlord. What underpins the proper subletting of a commercial property is the attention to detail at every step of the process. Nonetheless, aside from the legal or technical aspects, it is always important to consider whether subletting is the right course of action before embarking on it. It is ultimately important to judge from a business standpoint whether subletting is the most suitable and most appropriate course of action for the relevant party, and this will entail judging whether the advantages outweigh the risks.