By Phillip Leaman
19 January 2016
Businesses (tenants) are left with premises they do not want for a variety of reasons:
They outgrow the space;
They reduce their business and have too much space to occupy;
They have financial troubles and can not afford the rent.
Normally, a lease is entered into for a specified term which could be for a number of years to come. Quite often, the landlord is unwilling to let the tenant out of the lease. A solution to the above problems is for the tenant to sublease part or all of the premises to a sub tenant.
Getting a sub tenant is the first step, but the relationship between the sub tenant, tenant and landlord needs to be carefully documented in a sub lease.
We recommend that all parties to a sub-leasing arrangement consider the following issues when reviewing a sub lease:
1. The obligations of the tenant and the protection of the landlord
- It is imperative that tenant and sub tenants obtain the landlord’s consent to the proposed sublease arrangement. Usually, a sub lease without landlord’s consent will be a breach of the tenant’s lease with the landlord.
- A sub tenant only has rights for as long as the tenant has rights under the head lease. If the head lease is terminated or expires, so does the sub lease. The sub lease should end before the term of the head lease ends.
- A sub tenant’s breach of the head lease will, without more, constitute a breach by the sub-landlord of the head lease. Accordingly, the terms of the sub lease imposing obligations on the sub tenant should be equal to, or more restrictive than, the equivalent provisions of the head lease.
- Usually a sub tenant takes on the obligations of the tenant under the head lease as well as any additional provisions agreed upon between the tenant and sub tenant. However, the tenant remains at all times liable to the landlord.
- From a sub tenant’s perspective, they might want to include additional provisions to allow them to take over the lease in the event that the tenant defaults in their obligations under the head lease (for example, not paying the landlord rent).
It is important that the sub lease requires the sub tenant to obtain and maintain adequate insurance cover having regard to both the interests of the tenant and the landlord.
3. Further terms
Where the sub lease is to contain options for further terms (and the sub tenant seeks to remain in continual occupation, it is imperative that the sub lease permits the sub tenant to exercise further terms in the event that the tenant exercises the option. It may be appropriate that the sub tenant has a first right of refusal to take the lease if the tenant fails or refuses to exercise its option.
4. Retail Leases Act 2003 (Vic)
Where the permitted use of the sub let premises includes the sale or hire of goods or the retail provision of services, the sub lease will generally be subject to the operation of the Retail Leases Act 2003 (Vic) (the Act). Accordingly, the tenant should ensure that the terms of the sublease comply with the provisions of the Act and that all relevant statutory disclosures are provided to the sub tenant.
It is important to have the sub lease documented properly and that the interests (and future plans) of the sub tenant are addressed in appropriate mechanisms to secure tenure as required after the end of the initial term.
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