The weak economy is leading many businesses to try and reduce costs by subletting their leased properties. But before you do so, make sure you have your house in order.
In a simple subletting (also known as underletting), you give occupation of a property to a third party who pays you rent, while you continue to pay rent to your landlord.
But good preparation is essential – you need to ensure that you consider your leases (and any supplementary documentation) carefully and liaise with your solicitors accordingly.
The right to create a subletting is usually available, but the first thing you should do is check that you’re allowed to do so, under the terms of your lease. Generally, leases allow you to sublet, but consent from the landlord will almost always be required.
While consent can’t be withheld unreasonably, there may be a number of conditions that the landlord can lawfully attach to his or her consent.
All of it or part of it?
There’s an important distinction between subletting the whole of your property or just part of it.
Subletting part of the property has clear advantages: not only can you reduce your overheads, but it can also lead to a useful connection with another business. For example, an accountant and an IFA working from the same office can often generate a number of referrals for each other. But unless you have a particularly large property, it’s unlikely that you’ll have the right to sublet part only.
Whether you’re subletting part of all of it, the chances are that you need to approach your landlord for consent before you can actually sublet.
The landlord must act reasonably – he can’t withhold his consent without a valid reason. Of course, if you don’t actually have the right to sublet, then there’s no obligation for the landlord to be reasonable about it, or to even respond to your request!
One common provision in leases is that the rent to be reserved in the underlease must not be less than the rent payable under your lease, and failure to ensure this could result in a breach of the lease.
This can often create difficulties, since in the current market, the rent payable under your lease may actually be greater than the market rent – so you may struggle since no-one will want to pay a high rent.
When you either don’t have the right to sublet or struggle to do so because of the rental market, there’s nothing you can do other than approach your landlord to see if he’ll take a commercial view.
But note that if your lease with a landlord is ever breached by your actions, the landlord may commence forfeiture proceedings. You could lose your lease, your office, and if location is paramount to you, it could mean losing your business.
Record your agreement
Another area where people fall victim to legal action is by not recording any new agreement with the person you’re subletting to.
It’s essential that you have a written agreement by deed, witnessed and dated. The terms of your lease may actually mean that the landlord must approve the underlease before it’s completed.
You’re still accountable
Furthermore, you’re still fully accountable for your lease, so if for some reason the new tenants fail to make a payment, you’re responsible.
Remember that you’re accountable not just for the rent, but also for the property itself. You must stipulate within the contract that those that sublet are responsible for their own area, including damage, injury, fire, etc.
You’re also responsible – and liable – for common areas. But you can mitigate this by stating in the contract that there’s a service charge for the upkeep of the common areas. For example, if continual access through the winter months damages flooring in an entrance area, the monthly service charge costs could cover this. In addition, you could also claim a percentage of insurance costs from the tenant, to cover your own insurance.
The law is there to protect you, so following it is invaluable. Choosing to find shortcuts can often land you in hot water – what seems like a great way to cut costs could have a big price tag if not done in the right way.
Laura Hallett is a solicitor at Marsden Rawsthorn Solicitors.
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