As the demand for flexibility in leasing arrangements continues to rise, subleasing has become an increasingly popular option for both businesses and individuals across numerous industries, allowing businesses to optimise space utilisation and cost management.

Subleasing involves leasing all or part of a property from a Tenant, who is already leasing the space from the Landlord.  While subleasing can offer benefits, such as cost savings and flexibility, it’s important to understand the risks and legal considerations involved for both the primary Tenant and the Sub-Tenant.

If subleasing is something that you are considering, either as the primary Tenant with unused space or as a Sub-Tenant seeking to sublease space from another business, then keep reading.

Exploring the UPside, as well as the DOWNside!

Subleasing offers several advantages for the primary Tenant, including the ability to offset some or all of their leasing costs, in particular rent and outgoings, particularly if they are not utilising the entire space themselves.  

The additional rent received from a Sub-Tenant can significantly ease the rental burden, allowing both the primary Tenant and the Sub-Tenant to enjoy premium space, without either of them carrying the full load themselves. 

It also provides the primary Tenant with the flexibility to downsize or scale their space, without the need to renegotiate their Lease with the Landlord.

For the Sub-Tenant, subleasing can provide an affordable alternative to leasing their own space and committing to a fixed term Lease, as they may have the opportunity to occupy space in a more desirable location than they could afford on their own, at a lower cost, for a shorter term.

However, there are potential downsides to consider as well….

For the primary Tenant and the Sub-Tenant, subleasing can pose financial risks. If the Sub-Tenant fails to fulfill their obligations, this will leave the primary Tenant responsible for performing all aspects of the Lease, including covering all of the rent and associated expenses.  For the Sub-Tenant, there may be limited control over the space, potential instability if the primary Lease is terminated and additional challenges in dealing directly with the Landlord.

Risks for the Primary Tenant:

When considering subleasing space, the primary Tenant must be aware of the potential risks involved. If the Sub-Tenant fails to make their rental payments, causes damage to the property or breaches the sublease agreement, the primary Tenant will remain responsible for the Lease and for addressing any of these issues with the Landlord.  Remember, there is generally no direct relationship between the Landlord and the Sub-Tenant.

Risks for the Sub-Tenant:

As a Sub-Tenant, there are also important risks to consider.

If the primary Tenant defaults on their Lease, including the non-payment of rent to the Landlord, the Sub-Tenant may face loss of access to the space, causing unexpected disruption to their business.

Sub-Tenants generally have limited visibility of the rental payments to the Landlord and of whether the financial obligations of the Lease are being met.  It is also important that before entering any Sub-Tenant arrangement, that you have a clear understanding of the primary Lease terms, to ensure that your sharing of the space, does not constitute a breach or cause any friction with the Landlord.

We always recommend that Sub-Tenants either try to pay their rent directly to the Landlord or are, as a minimum are provided with a rent receipt from the primary Tenant, showing that their rent under the Lease is up to date and there is not a risk of them being in breach of their Lease for non-payment of rent. 

Now for the documentation …

For both the primary Tenant and the Sub-Tenant, it’s critical to navigate the legal paperwork associated with subleasing. The primary Tenant should review their original Lease agreement, to ensure that subleasing is even permitted and if there are any specific requirements or restrictions from the Landlord in this regard.

The sublease agreement between the primary Tenant and the Sub-Tenant should outline all the terms and conditions, including the rent, the length of the sublease, the permitted use of the space that is being subleased out, any maintenance responsibilities and any other relevant provisions from their Lease, that they wish to pass on or share responsibility for. It is also important to include exit provisions.  How does the sublease terminate if things don’t work out?  What are the notice periods? 

It’s advisable for both parties to seek legal advice to ensure any sublease agreement complies with any local regulations and that both parties have adequately protected their interests.

What about Landlord Consent?  Do I need to ask my Landlord before I do this?

In most cases, the primary Tenant is required to seek the Landlord’s consent before subleasing any of the premises. This often involves providing the Landlord with a copy of the proposed sublease document which will include the identity of the Sub-Tenant and the terms of the sublease arrangement. Failure to obtain the necessary consent from the Landlord can result in the primary Tenant breaching their Lease.

So, should I do it?

Ultimately, subleasing can be a mutually beneficial arrangement for both the primary Tenant and the Sub-Tenant. It is just important to carefully consider the associated risks and obligations. Many, many, hair, beauty and service-related businesses operate successfully with subleases every day.

By understanding the pros and cons, having the necessary paperwork and obtaining the appropriate permissions, both parties can enjoy a mutually beneficial relationship and can make their way through the subleasing process with confidence, minimising potential challenges.

 

Your Leasing Co. specialises in Tenant/Landlord communication and representing Tenants to negotiate favourable lease terms.  If you have any questions or need any help to get the best outcome from your Lease, you can call us for a free, no obligation conversation on 1300 356 702.