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The legal considerations of subleasing a commercial space

Sara Hatcher and Sara Ibrahim

Subleasing continues to be an attractive commercial arrangement for tenants seeking to reduce costs and financial pressure of meeting rental instalments, as well as ensuring rental income is maximized for landlords.

However, before embarking on a subleasing arrangement, it is important to consider the legal implications involved, and whether the lease itself permits this arrangement. If a tenant unlawfully sublets, they will find themselves being in breach of the lease.

What is subleasing?

A sublease is an agreement where a tenant of a lease (tenant) grants to a subsidiary tenant (subtenant) part or whole of the property for exchange of rent (sublease). The term of the sublease must be less than the term of the original lease. Once the sublease becomes operative, the subtenant will have exclusive possession over the leased area defined in the sublease.

This can be distinguished by an assignment of lease, where the current tenant is assigning all of its rights and obligations under the lease to a new tenant. Essentially, the new tenant will be replacing the current tenant.

Considerations for tenants and landlords

  1. Check the original Lease Agreement: As a tenant, you should first turn to the lease between yourself and the landlord as a starting point for any subleasing arrangement. A tenant should review the lease, specifically any subleasing clause, which will determine whether subleasing is permitted and whether there are any restrictions or conditions that must be met.
  2. The tenant must comply with any restrictions or conditions set out in the lease. Failure to do so will result in the tenant being in breach of the lease. In addition, in NSW there is generally a prohibition on tenants subleasing any part of the premises without obtaining the landlord’s consent. The lease will often set out the basis on which the landlord can withhold its consent.

  3. The Sublease Agreement: The sublease agreement outlines the terms and conditions of the agreement between the tenant and the subtenant. It is a separate agreement from the lease, however it must be consistent with the lease’s terms and conditions. The sublease should cover important issues such as rent, security deposits, maintenance responsibilities, and any limitations on the subtenant's use of the premises.
  4. Rent: The sublease should specify the amount of rent the subtenant will pay and the frequency of payments. The subtenant's rent should not exceed the rent paid by the tenant to the landlord. The tenant remains responsible for paying the landlord rent, even if the subtenant fails to pay rent to the tenant.
  5. Maintenance Responsibilities: The sublease should specify the maintenance responsibilities of the subtenant. The subtenant may be responsible for maintaining the premises in the same condition as when they were leased.
  6. Termination: The sublease should specify the conditions for termination. If the tenant breaches the lease, and the landlord subsequently terminates, the subleasing arrangement will also automatically terminate.
  7. Liability: The tenant remains liable for any damages or breaches caused by the subtenant. The sublease should include an indemnification provision requiring the subtenant to indemnify the tenant for any damages caused by the subtenant.

Subleasing a commercial space can be a cost-effective solution for businesses. However, it is important to consider the legal implications involved, both as a tenant and a landlord. It is critical for a tenant to refer to the head lease as first point of call, so that the obligations and restrictions for subleasing is understood.

Further Information

If you wish to find out further information about subleasing arrangements and how they may affect you, please contact the Russell Kennedy Lawyers Property & Development Team who are happy to assist with your queries.

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