How To Sublease Commercial Property

17 October, 2018 | Kristal Rogers

So you want to sublease part of your commercial tenancy, what do you need to think about?

Consent for the sublease

The first thing you should do is check your lease to make sure you can sublease the premises.  If the lease allows you to sublet, then you should contact your landlord.  You will need to obtain consent from your landlord (the head landlord) for the sub lease. The head landlord cannot unreasonably withhold their consent, but they may request further information regarding the subtenant to make sure they are suitable.

Your Deed of Lease will specify the use for the commercial property as being your specific type of business. If your subtenant’s business is different from yours, you will need to seek specific permission from your landlord.

You will be responsible for the legal costs of gaining your landlord’s consent. You may wish to have it included in the sublease that your subtenant covers these costs.

What obligations do you owe the subtenant?

When you sublet part of your commercial premises, you are effectively becoming a commercial landlord (like a mini commercial landlord). As a landlord there are rights and obligations you owe to your tenant. Some of these are covered by statutory law, and some will be covered by your lease agreement with your subtenant.

As sub-landlord you are responsible for:

• Permitting the subtenant to have quiet enjoyment of the premises during the term
• Using all endeavours to require the head landlord to observe and perform its responsibilities in the head lease
• Obtaining consent of the head landlord for required matters in the sublease and head lease.  For example if the subtenant wishes to make alterations or additions consent is required under both the lease and sublease.
• If the sub-landlord (you) receives any notices under the head lease then they must provide a copy of the notice to the subtenant.

What responsibilities /liabilities do you have to your landlord?

If the subtenant does not pay the rent you as the head tenant are still responsible under the head lease for payment of the rental and outgoings to the head landlord.

You are responsible for complying with your obligations under the head lease, including (but not limited to) reinstatement.

In order to protect yourself, you should:

• Complete due comprehensive due diligence on your prospective tenant including obtaining financial statements, of the tenant and any guarantor
• Get personal guarantees or a bank bond from the subtenant.
• Follow up quickly if your subtenant is late with payment of rent or outgoings

How will you work out outgoings?

The proportion of outgoings (insurance/electricity etc.) is adjusted on a percentage basis of the area being subleased. For example, if the area that you lease is 1000m2 and the area of the sublease is 100m2 then the subtenant will be responsible for 10% of outgoings.

If this is the way outgoings are proportioned, it is important to consider the nature of the business you are subletting to. Is it a hairdresser that might use a lot more water than you, or a business that may have a high electricity load? A simple space proportioning may not be reflective of how much of the outgoings each business will use.

What happens if you want to move premises/end your lease?

When you are defining the terms of the sublease, the sublease rent review dates need to coincide using the rent review dates and the review process as set out in the head lease. It is always recommended the rent review and any lease renewals dates are aligned with the head lease renewal and review dates.

Subleases are usually for one term.  This is to prevent any problem if you as the head tenant decide not to renew your head-lease at the end of your lease term.  This means the sublease will terminate if you decide not to renew the head lease for a further term before any renewal of the lease.

You will need an official agreement

To protect both parties, you will need a Deed of Sublease.  A copy of the head lease is attached to the Deed of Sublease so the subtenant knows the contents and obligations under the head lease.

This lease should cover:

• The area of the sublease needs to be well defined so it can be clearly identified. It is always useful to have a plan prepared that can be attached to the sublease.
• The term of the sublease. This term should expire before the term of the lease, i.e. if your lease is a three year term; the sublease needs to be for a lesser term.
• If any provision between the sub-landlord and subtenant differs to the head lease, for example who is responsible for the fit out and reinstatement then this needs to be recorded in the sublease terms. The proportion of outgoings is adjusted on a percentage basis of the area being subleased
• A further term for provision regarding contribution towards legal costs associated with the preparation and execution of the Deed of Sublease and obtaining the head landlord’s consent.

What are the subtenant’s responsibilities?

The subtenant must always comply with the sub-landlord’s obligations as the head tenant in the head lease with the exception of payment of rental and other money the head tenant needs to pay in the head lease.

Are you considering subleasing your commercial tenancy? Contact NZ commercial property law specialist, Kristal Rogers to set up an appointment and make sure your interests are protected.