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Thinking of subleasing? What you need to know

By Matthew Joyce & Tom Fitall

Thinking of subleasing? What you need to know

COVID-19 has forced a rapid acceleration in the existing trends shaping how we work. Working from home is becoming normal and businesses are reconsidering how much office space they really need to be fully operational. For some businesses, reducing office space and saving on rent is one antidote to the economic harm caused by COVID-19. But how does this really work? Can a tenant simply divide up their office and re-let unused space? And what should tenants and landlords be aware of?

Subleasing

In legal terms, the dividing up of premises to enable another tenant to make use of extra space is called subleasing. Typically, there will be a landlord (who owns the property), a tenant (the person who took on the original lease), and a subtenant (the person who takes a portion of premises originally leased to the tenant). In this configuration the tenant is typically also referred to as the “head tenant”.

If a subleasing arrangement is approved by the landlord, the head tenant nonetheless remains responsible for discharging all of its obligations to the landlord as set out in their original lease. Ultimately the landlord can also hold the head tenant responsible if things go wrong – e.g. where damage is caused to the premises, or where a subtenant’s actions breach the original lease. Because of this, before a tenant considers a sublease, it should first be sure that any subtenant is capable of complying with the obligations set out in the original lease. The tenant should also have a copy of its lease to hand so that it can provide this to any prospective subtenant, and the subtenant should thoroughly review the original lease before entering into any subleasing arrangement.

Does your Deed of Lease allow subleasing?

While subleasing arrangements can be beneficial for all parties, there are some important things to consider before taking any action. The ADLS version of the Deed of Lease has a clause (and most other leases will typically contain similar provisions) which prevents a tenant from subleasing without first obtaining the landlord’s written consent.  It is critical to first understand any provisions in your lease dealing with subleasing or assignments – to determine whether this is permitted by the lease.

The current ADLS Deed of Lease also provides that a landlord is required to act reasonably when considering a subleasing request – and that lease sets conditions which a tenant and a proposed subtenant must be able to meet before a landlord is required to consider any request. Among other things these include the requirement that any proposed subtenant is respectable and responsible, and that the subtenant is capable of meeting their commitments under any subleasing arrangement. A prudent landlord will likely require full details from the tenant about the subtenant and any proposed subleasing arrangement before it grants consent – and a tenant will have to supply full particulars to the landlord, which likely extends to supplying a copy of any deed or licence to be entered into between the tenant and the subtenant.

A tenant should always have a written agreement (which could take the form of a temporary licence) with its subtenant in any event. A full copy of the original lease should be attached to that agreement. The agreement between the tenant and subtenant should also be carefully checked by your lawyer to ensure that important issues are included: for instance— bond payments, access, insurance, how the arrangement may be terminated, how utilities and rents are payable, and what happens if there is a dispute.

The following points outline some questions that landlords, head tenants and subtenants may have in relation to subleasing. There will be more questions depending on your specific situation and whether your specific deed of lease contains its own provisions in relation to these issues. We advise you to get in touch with one of our team to gain a comprehensive understanding of your situation:

Things for landlords and head tenants to think about:

  • Does the Deed of Lease permit subleasing?
  • Are the proposed subtenants trustworthy and financially reliable?
  • Are the proposed subtenants capable of complying with all of the obligations in the original lease?
  • Can the subtenants be evicted they breach a term of the lease or are no longer able to comply with the obligations in the original lease?
  • What will happen if things go wrong (e.g.: the subtenant damages the premises?)
  • What kind of insurance do I have and will that need to change?

If you have any questions, please contact one of our commercial partners:
Nigel Moody | email Nigel | P: 04 916 7465
John Steel | email John | P: 04 916 7495
Nigel Stirling | email Nigel | P: 04 916 7472
Claire Byrne  | email Claire | P: 04 916 7483
Dave Robinson | email Dave | P: 04 916 6307
Mike Gould | email Mike | P: 04 916 6302
Rhys Williams | email Rhys | P: 04 916 6452
Brett Gould |  email Brett | P: 06 370 6475
Topics: COVID-19 , Property