How can in-house legal prepare for subletting? Subletting part of an office, unit, or other commercial premises can be a great option for a growing business. Rents are often more affordable than full leases. A shorter agreement also provides flexibility. Some spaces are even furnished and ready to move into, saving on fit-out costs.
Taking a sublease of part of a building is not, however, without risk.
Mark Reading sets out five key points for in-house legalteams on subletting. Mark shares what to consider when tasked with putting a sublease in place and measures to protect your business.
1.How long will subletting part of a business take?
Having made the decision to sublet, you may need to temper management's expectations about when you will actually be able to move in. Before moving in,various steps will first need to be taken.
Most modern leases require the tenant to obtain the superior landlord's consent to sublet to the subtenant. To obtain this, a set procedure needs to be followed – which can take several weeks or longer. The superior landlord may be under a statutory duty to deal with an application for consent within a reasonable time, and pressure can be put on them if they delay.
The tenant may also be required to obtain its lender's permission under the terms of its loan.
Searches may need to be carried out. For example, see whether there are planning conditions restricting how the premises can be used or hours of operation.
It will take time for external solicitors to agree the wording of a licence to sublet and the form of the sublease.
2.How in-house legal can make sure they get the premises, rights, and utilities with a sublet
You need to check the extent of the premises you can use under the sublease, including any storage areas. Check that you will have all the rights you need such as the right to use communal areas, facilities or parking spaces.
Check what security arrangements there will be to protect the part of the building you are taking. Will you have to contribute towards associated costs?
One particular problem we see is where a subtenant has moved in only to find that there is an inadequate electricity supply or data connection for their needs. Make sure to check that your requirements will be met.
3.Points to cover in heads of termsof subletting for in-house legal
There are several key matters to address when negotiating heads of terms (subject to contract), including:
- Will the sublease have "security of tenure" under the Landlord and Tenant Act 1954, or will it be "contracted out"? Security of tenure means you will have the right to remain in occupation after the end of the contractual term, and to request a new lease. Most subleases will, however, be contracted out meaning they will terminate on the expiry of the fixed term.
- If possible, try to limit your repairing obligations. You can do this by reference to a detailed schedule of condition prepared by an experienced building surveyor.
- If the rent is not inclusive of all services, consider seeking a service charge cap.
- If the tenant tries to include a rent review clause in a short sublease, try to delete it or restrict its scope and effect.
- If you want additional flexibility to bring the sublease to an end before the expiry of the fixed term, try to include a break clause.
- Check that adequate insurance is in place, and whether you will be required to contribute towards a proportion of the premium.
4.Understand the significance of the headlease
This is one to discuss with your external solicitors, but the point is not to focus solely on the sublease.
The headlease might contain potentially problematic provisions. For example, the headlease might stipulate that the sublease rent, and any rent reviews, should be the same as in the headlease, or it might contain a break clause that, if triggered, would terminate the sublease as well.
Sometimes, the superior landlord might even try to compel the subtenant to agree to comply with the terms of the headlease. This may risk undermining any limitations of liability you might have negotiated with the tenant.
Many cases we deal with involving subleases come about due to issues with the head tenant's solvency which can cause serious problems.
If the headlease is forfeited, for example, whilst you might be able to apply to court for relief from forfeiture to allow you to continue to use the property, this will be expensive and take time.
If the tenant goes into liquidation, the liquidator will usually end (disclaim) the tenant's obligations relating to the property. Again, you might be able to remain in occupation, but the superior landlord will be entitled to require you to pay the headlease rent.
5. Look ahead to the expiry of the sublease
The focus for many in-house legal teams will understandably be on getting up and running. But keep in mind what will need to happen at the end of the sublease.
Most subleases will oblige you to return the property in a minimum required condition. However, this will depend on the extent of the repairing obligations you have negotiated. Add a calendar reminder to start preparing for this at least six months before the expiry of the contractual term.
In our experience, subtenants often underestimate what work is required to do this. It is usually sensible to engage a building surveyor early on to advise on what works you need to carry out, and to what standard.
Failure to return the premises to the required state may result in the tenant bringing a "terminal dilapidations" claim against you. This can come as a proportion of the amount it has to pay to the superior landlord for breach of the repairing obligations in its headlease.
The benefits to subletting a commercial space for growing businesses are plenty, but there are risks. In-house legal teams need to be aware of the risks and how they can mitigate these. For instance, legal teams should be prepared for time-consuming processes and ensuring agreements cover essential rights and utilities. Similarly, in-house legal teams need to plan ahead for the sublease's expiry which is vital to avoid potential claims.
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.
