Subletting Your Commercial Property: Rights, Risks and Hidden Obligations

What is commercial subletting, and how does it work?

Commercial subletting is the process by which a tenant, who leases a property from a landlord, rents out all or part of their space to another party, known as the subtenant.

The original tenant holds the head lease with the landlord and remains responsible for the property, even when the subtenant is occupying it. The sublease then exists under the original lease. Essentially, that makes the original tenant a ‘middleman’ of sorts, managing the subtenant's occupancy while still being liable for rent and maintaining the property’s obligations.

Whether or not you can sublet a commercial property will depend on the terms of the original lease. Even if the lease permits it, you should get written consent from the landlord before you go ahead. 

Can I sublet my commercial property?

Landlord consent rules for commercial subletting are dependent on the specific lease agreement and the landlord’s policies. The first step is to check that you have the legal right to sublet.

Commercial tenants in the UK do not have the automatic right to sublet a property. There are usually subletting clauses included in commercial lease agreements that outline when subletting is permitted and the conditions you must meet. Your lease will either:

• Expressly prevent subletting

• Allow you to sublet after obtaining the landlord’s written consent

• Make no mention of subletting, in which case, it is allowed, but you should still ask for the landlord’s consent to prevent any issues

If you ask for the landlord’s permission in writing and subletting is permitted by the terms of the lease, the landlord cannot unreasonably withhold their consent without a valid reason.

The landlord will typically request details about the subtenant, including financial information and their intended business use. They may then refuse consent if they believe the tenant poses a financial or reputational risk or plans to use the space in a way that’s not permitted under the original lease. 

Landlords will also usually charge an administrative fee to cover the cost of considering the request, conducting reference checks and reviewing the proposed sublease. They may impose reasonable conditions too, such as security or guarantees, to ensure the subtenant doesn’t adversely affect the building or other tenants.

What are the legal risks of subletting commercial property?

Even after you have obtained the landlord’s permission, there are still various rights and obligations when subletting a commercial lease that you must be aware of. 

You remain liable under the original lease

A common misconception is that the sublettor assumes all the obligations of the head lease. However, as the head tenant, you are responsible for ensuring that the original lease terms are met, even if you no longer occupy the building. That includes:

• Paying the rent to the landlord

• Complying with repair and maintenance obligations

• Making service charge payments and meeting all other covenants (obligations) included in the lease

If your subtenant doesn’t pay the rent or breaches their sublease obligations, it’s your liability, not the landlord’s. To protect yourself, you should ensure that the sublease you grant contains at least the same covenants as the head lease. That should include an obligation for the subtenant to comply with its terms. 

That will protect you if the subtenant breaches the terms of the head lease, for example, by operating a noisy business when the lease prohibits it. Closing those gaps ensures that if the landlord takes action against you for a breach of the head lease, you, in turn, can make a claim against the subtenant.  

Licensing or planning law breaches 

If a subtenant wants to change the way they use the space or make alterations, you must check the terms of your head lease and consult with the local authority. 

Many leases specify which types of businesses or activities are allowed in the property and may require the landlord’s written consent for any changes. That could include things like altering the property’s structure or changing its use (for example, from office use to retail).

You should also check with the local authority to see if a change of use requires planning permission or other regulatory approvals. Most leases restrict alterations to ensure the property is used in accordance with planning laws and the landlord’s expectations.

As the head tenant, if the subtenant changes the use of the space or operates without proper licenses, the landlord can hold you responsible. 

Insurance issues

An often-overlooked legal risk of subletting commercial property is failing to notify your insurer about the sublease. If the subtenant is engaged in a higher-risk business activity, this oversight could invalidate your insurance policy. Without proper coverage, you could be left personally responsible for repair costs, property damage or even personal injury claims.

To protect yourself, make it a condition of the sublease that the subtenant arranges their own insurance, including public liability and property damage coverage. That way, if something goes wrong, whether it’s a fire, flooding or an accident involving a third party, the subtenant’s policy will cover it, and you won’t be left to foot the bill for events outside your control.

‘Overholding’ risk

When drafting the sublease, include an expiry date that comes before the end of the head lease and have clear conditions related to early termination or renewal to avoid something called ‘overholding’. Overholding occurs when a tenant or subtenant remains in possession of a property after the lease has expired or been terminated. 

If the subtenant does not vacate the property when the head lease ends, it can automatically create a month-to-month or periodic tenancy, often at 1.5 or 2 times the original rent.

As overholding constitutes a breach of the head lease, the landlord will usually hold the primary tenant responsible for resolving the issue. That could mean paying penalties, covering legal costs or taking action to remove the subtenant.

What are the alternatives to subletting?   

The legal risks, rights and obligations of subletting a commercial lease mean it’s not necessarily the right solution for everybody. Depending on your circumstances, there may be better options. 

• Lease assignment - Lease assignment involves transferring the lease to a third party who takes on the head tenant’s rights and obligations. That may be a good option if you want to exit the lease and no longer be liable. You will need the landlord's permission to assign the lease, and they may impose conditions.

• Lease surrender - Lease surrender allows you to terminate the lease early, but you will need the landlord’s agreement. That can be appropriate when you no longer need the premises and want to end your obligations without subletting.

• Licence to occupy - A licence to occupy grants temporary permission to another party to use the space without transferring the lease. It’s a flexible option for short-term occupancy without the formalities of subletting.

• Renegotiating the lease - In some circumstances, it may be possible to renegotiate the lease with the landlord, but both parties must agree to any changes. That could be an option if you want to adjust the lease terms due to financial pressure or changing business needs.

• Negotiating a rent reduction: Another option is to request a rent reduction or a rent-free period, often in exchange for a longer lease term or other concessions. That could be a good strategy if you want to remain in the space while reducing costs.

Understand your rights and obligations when subletting a commercial lease

At Eddisons, we provide comprehensive lease advisory services to help commercial landlords and tenants understand their obligations and avoid common mistakes throughout the lease cycle. That includes expert guidance on everything from lease renewals and rent reviews to subletting, lease surrenders and other lease exits.

Please get in touch or complete the form below to arrange a consultation. We will review your lease, assess your options and provide clear guidance on the most appropriate route forward.