Subletting or Assigning a Commercial Lease
Subletting a Commercial Lease
Subletting is when a tenant rents out their premises (or a portion of them) to another person (the subtenant) for a limited period, typically less than the remaining lease term.
Why Sublet if you are a Tenant?
- You want to operate from the same location but do not need all of your current floor space. Subletting a part of your premises will allow you to obtain a rental income from the subtenant for the part they lease.
- You plan to return to your premises, potentially after locating somewhere else or once you’re in a better financial position.
- Your lease doesn't allow assignment.
- You want to maintain control over the property.
Benefits for the Tenant:
- You remain the leaseholder, retaining rights and responsibilities under your own Lease.
- It's a flexible solution for temporary situations.
- You can charge a rent that covers your expenses.
Watch Out for Pitfalls Tenants:
- Your landlord's approval to sublet is often required and you will likely need to cover the Landlord's legal fees.
- You remain responsible for rent payments and any damages caused by the subtenant.
- Finding a trustworthy subtenant can be a challenge.
Subletting - Considerations for Landlords:
- Subletting allows the original tenant to retain their lease with you while temporarily renting the property to a subtenant. This means the lease terms and conditions, including rent, usually remain unchanged. As a result, you maintain control over the rent amount.
- Subletting can add an additional layer of complexity to your lease management as you will need to review and approve the subtenant (subject to what the Lease says).
Assigning a Commercial Lease
Assignment is another way a Tenant can exit a Lease. When you assign a Lease, you essentially transfer your rights, responsibilities, and the Property itself to a new Tenant.
Why Assign a Lease if you are a Tenant?
- You're leaving for good and don't intend to return.
- You want to sever all ties with the Property.
Benefits of Assigning a Lease:
- You're free from future rent and maintenance obligations.
- The new Tenant assumes full responsibility.
Watch Out for Pitfalls:
- Not all Leases allow assignment, so check your agreement.
- You may need Landlord approval, and they may be able to reject the new Tenant for valid reasons. You may also need to cover the Landlord’s legal fees.
- You may be asked to provide an Authorised Guarantee Agreement whereby you will effectively become guarantor to the new Tenant.
- A new Tenant may not want to “inherit” any existing dilapidations liability so you may need to settle this with either the Landlord or the new Tenant as part of the negotiations.
Assignment - Considerations for Landlords:
- Lease assignment means you deal directly with a new Tenant, who assumes full responsibility for the Lease and the Property, which can be beneficial if you have had concerns about the original Tenant’s reliability. You may also be in the position to draft a new Lease with the incoming Tenant, allowing you to adjust the terms as needed.
Most commercial leases will set out the conditions you can impose on an assignment, such as obtaining an Authorised Guarantee Agreement from the outgoing Tenant or obtaining a guarantor or rent deposit from the new Tenant.
Choosing the Right Path
The choice between subletting and assigning depends on your circumstances and will also depend on the Lease terms. Subletting suits those Tenants who plan to return, prefer more control, or face temporary hurdles. On the other hand, assigning a Lease offers a complete exit strategy.
There are other options too that can be considered. Exercising a break clause or surrendering a Lease are two ways in which a Lease can be ended early. See our article “3 ways to end your Commercial Lease early” for more information on these.
Before making a decision, Tenants should always review their Lease agreement and communicate with their Landlord to understand their requirements. Early legal advice can also ensure that you choose the right path forward.
If you’re looking to assign or sublet your lease, or you tenant has been in contact, BPE can help!
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.