Maximising flexibility through subletting – key considerations for office occupiers

Our previous article, The New Era of Offices Post-Pandemic, highlighted the shift in work patterns over the years following the Covid-19 pandemic, with office occupiers seeking greater flexibility in their office space. The ability to scale desk numbers based on office attendance has become increasingly important. In this context, subletting can be a valuable tool for tenants looking to reduce costs and generate income from their surplus space.

If you are such a tenant seeking to sublet surplus space, there will be various restrictions and requirements in your lease as to what you are allowed to do, and in this article, we outline some of the key points to consider.

Landlord consent

• Typically, landlord consent will be needed to the subletting, and this usually must not be unreasonably withheld or delayed. As the landlord will need time to consider the application, once heads of terms are agreed consent should be formally applied for as early as possible. There is no prescribed form for the application, but it is advisable to send a formal letter to the landlord and their solicitors, if known, so that the date of the application is recorded in the event of any subsequent dispute.
• The procedure: Consent will be granted by a formal licence to underlet between the landlord, the tenant and its subtenant. The landlord will require you to pay its costs in considering the application for consent, usually just its solicitors’ fees. A costs undertaking from your solicitors to the landlord’s solicitors will be required before a draft licence will be issued.
• Further consents: The landlord may itself require further consents from its lender or its own superior landlord, which is worth considering at the outset of a transaction to avoid any delays down the line.

Lease restrictions

Office leases will contain various controls over the tenant’s ability to sublet, in addition to the landlord consent requirement above. The exact lease terms will vary and should be checked at the outset of a transaction, but the usual considerations are as follows:

• Who can I sublet to? The landlord will want to review the covenant strength of your proposed subtenant and may ask for their accounts for the past few years. To streamline the process, it is worth including these accounts in the initial consent application. If not satisfied with the proposed subtenant’s covenant strength, the landlord may ask for a guarantor or a rent deposit, and the lease will usually specify whether the landlord must act reasonably in this respect.
• What parts of the office can I sublet? Typically subletting of the whole of the demised premises is allowed, and depending on the premises themselves in office leases it is fairly usual for tenants to be able to sublet defined “permitted parts”. “Permitted parts” will vary, but examples are whole floors, multiple adjoining floors, or part of a floor that can be divided from the rest. Any parts underlet will usually need to have an independent access from the common parts of the building.
• How many times can I sublet? Leases may limit the number of occupations allowed. The limit will depend on the number of floors and size of the demise, but most commonly in a lease of one floor, the limit would be 2 separate occupations.

What terms must I agree with the subtenant?

Leases typically require various terms to be agreed with subtenants, so you should consider your own lease provisions at heads of terms stage, to avoid any conflict between terms agreed in the heads of terms with your subtenant and the lease. The key points to think about will be the following:

• 1954 Act: It is likely you will need to exclude the sublease from the security of tenure provisions of the Landlord and Tenant Act 1954, irrespective of whether your own lease has security of tenure. 
• Term: The sublease term must always be shorter than the headlease term to avoid an assignment by operation of law. Your lease may also require subleases to be at least a certain length, to prevent a stream of short-term lettings.
• Rent: The sublease must not be granted at a premium and must reserve a market rent; the landlord will require the rent to be market to prevent any negative impact on rent reviews at the building.
• Rent review: For the same reason, the landlord will usually require the sublease to include rent reviews at the same times and on the same terms as your lease.
• Service charge and insurance: Subtenants should be obliged to contribute to the building service charge and insurance on the same basis as other tenants in the building.
• Further alienation: The landlord will want to restrict further subletting, to reduce its own administrative burden of having too many tenants at the building. The standard position is that subtenants can assign the whole of their sublease on the same terms as you can assign your own lease, with both your own and the landlord’s consent. Assignments of part will be prohibited.
  
  The position as to whether subtenants will be allowed to create further sub-underleases is more varied. Some leases will allow this, whilst others will prohibit any further sub-underletting.
• Break clauses: If your lease contains a landlord break clause, you will need to ensure that you can terminate the sublease at the same time. Similarly, if there is a tenant break, you will need to terminate the sublease in order to comply with the break clause conditions, so to keep the flexibility of your own break you will want to include an equivalent break right in the sublease. You should ensure that the notice period for operation of the sublease break clause is shorter than the equivalent notice period in your own lease, to allow enough time for service of the break notice on the subtenant following service of any break notice by the landlord.
• Reinstatement: The subtenant should be required to reinstate its demise to the same condition as required by your own lease. The landlord can hold you liable for reinstatement irrespective of the subtenant’s occupation, so you should ensure that the subtenant is obliged to reinstate to at least the same standard as you at the end of the term.
• Subtenant fit-out: Landlord consent will be required for any subtenant fit-out works in the same manner as any alterations under your own lease.

What can I do if my landlord withholds consent?

The Landlord and Tenant Act 1988 provides statutory protection for tenants, provided that the lease contains a covenant not to sublet without landlord consent, and the consent is not to be unreasonably withheld.

In brief, the landlord must give consent except where reasonable not to, and within a reasonable time. What is a “reasonable” time will again depend on the particular circumstances, but the courts have said this will generally be days or weeks rather than months.