The rise of online shopping, changing consumer preferences, and the economic challenges brought about by Covid have led to tenants increasingly requesting consent from Landlord's to sublet their commercial leases.
So, what should the Landlord consider when granting consent?
A lot will depend on the provisions agreed in the lease, and therefore careful thought needs to be given to this at the outset of negotiations, particularly if the lease is silent on this issue or expressly allows underletting without consent.
If this is the case, the tenant is free to underlet the commercial property in whole or in parts without the Landlord's consent, and the Landlord may find their hands tied by what has been agreed in the lease.
Subletting of whole or part
In deciding whether the tenant should be permitted to underlet the whole or part of the property, consideration should be given to the nature of the premises, and the provisions in the lease should reflect what degree of control the Landlord wishes to retain.
For example, if the lease permits the underletting of part, then should there be a definition of the permitted part or a limit on the number of underleases or separate units of occupation?
This may be important, for example, where the lease is of a retail unit occupied by another tenant remaining in occupation, and the Landlord wishes to avoid the dilution of the tenant's overall presence.
Strength of covenant of the undertenant
Although the tenant remains "on the hook" in an underletting, the strength of the undertenant's covenant is still an important consideration.
Suppose the head lease falls away for any reason (i.e., is forfeited due to breach or even insolvency) then the undertenant may obtain relief from forfeiture from the courts and have the right to remain in occupation.
Should the sublease mirror the lease?
While this may seem the logical approach there will be a number of terms which will need to be varied.
A key one being the insurance provision and avoiding a situation where both the tenant and the subtenant face an obligation to insure under the lease, and the risk of a dispute arising between the insurance companies with regard to who pays should a claim arise.
The rent should not be lower (or higher) than the market rent as it could have a negative impact if the lease has open market rent reviews, and consideration should be given to disregard the sublease rent from the rent review.
Whether consent is to be by deed or not, care must be taken not to give consent in error when sending out the draft licence.
Is any other third party's consent required, such as a superior landlord or a mortgagee?
If the lease prohibits underletting on the terms sought, but the Landlord is still willing, is this to be by variation of the lease or a personal concession to the current tenant?
Who should bear the cost?
It is common for a lease to contain a covenant by the tenant to pay the Landlord's costs for granting a licence to underlet, and landlords should ensure an appropriate undertaking is obtained from the tenant's conveyancer at the outset to avoid any dispute arising.
If the tenant is allowed to underlet with the Landlord's consent, then the Landlord will be under a duty not to unreasonably withhold consent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.