For many businesses, taking on a commercial lease is a major commitment. Circumstances can change during the lease term, leaving tenants with unused space or the need to relocate before their agreement ends. One possible solution is a sublease, which allows the original tenant to rent out part or all of the premises to another business.
A commercial sublease agreement is the legal contract that makes this arrangement possible. It outlines the terms between the head tenant and the subtenant, while still keeping the head tenant liable to the landlord under the original lease.
What is a commercial sublease agreement?
A commercial sublease agreement is a legally binding contract in which the original tenant (the head tenant) lets another business (the subtenant) occupy the premises. The subtenant pays rent to the head tenant and agrees to comply with the conditions set out in the sublease, as well as relevant obligations from the original lease.
It is important to distinguish a sublease from an assignment. In an assignment, the tenant transfers their entire lease to another party, passing on all rights and obligations. By contrast, in a sublease, the head tenant remains bound to the landlord while also acting as landlord to the subtenant.
When and why are subleases used?
Subleasing can be a practical option for businesses in a variety of situations. Common reasons include:
- Having surplus office or retail space that is no longer needed.
- Downsizing operations but still being tied to a long lease.
- Relocating to a new site while the existing lease remains active.
- Generating additional income from unused areas of the premises.
Subleases can also benefit smaller or start-up businesses that want a shorter or more flexible arrangement than a full commercial lease. However, most head leases require the landlord’s consent before subletting is allowed, making it essential to check the terms carefully.
Key terms of a sublease agreement
A well-drafted sublease should clearly set out the rights and obligations of both the head tenant and the subtenant. Common clauses include:
- Rent and payment terms – How much the subtenant will pay, how often and to whom.
- Length of the sublease – This must be shorter than or equal to the remaining term of the head lease.
- Repair and maintenance – Specifying who is responsible for upkeep, often mirroring the obligations in the main lease.
- Insurance – Clarifying whether the subtenant contributes to insurance premiums or arranges their own cover.
- Permitted use – Setting out what activities the subtenant can carry out on the premises, in line with planning and head lease restrictions.
- Access and inspection – Outlining the landlord’s and head tenant’s rights to enter the premises.
- Termination – Conditions under which the sublease may be ended early, such as breach of terms.
Benefits and risks of subleasing
For head tenants, subleasing can reduce costs or generate income. For subtenants, it can provide affordable access to desirable premises without committing to a long-term lease. Subleases also allow flexibility, making them attractive to growing businesses.
However, risks do exist. The head tenant remains liable under the main lease, meaning any breach by the subtenant could ultimately fall back on them. Landlords may also restrict or refuse consent for subletting. Disputes can arise if the sublease terms are unclear or inconsistent with the head lease.
What this means for businesses
A commercial sublease agreement can be an effective solution for businesses needing flexibility, but it must be approached with care. Checking the head lease, obtaining landlord consent and ensuring the sublease terms are watertight are essential steps.
At Osbourne Pinner Solicitors, our commercial property team can draft and review sublease agreements to ensure they protect your interests and comply with landlord requirements. With the right advice, subleasing can be a valuable strategy for both tenants and subtenants.
With offices in Harrow, Canary Wharf, Piccadilly Circus and Manchester, we’re easy to reach throughout the north and south of England. But we can also advise you remotely by video call if you’re based further afield.
All cases start with a free 30-minute consultation, so we can understand your circumstances and advise on your options. Book yours today by calling 0203 983 5080, emailing [email protected] or using the form below.
