Solicitor Ed Williams, in our Commercial Property team, explains why a tenant may choose to underlet their commercial premises and what to consider.
Underletting refers to the practice where a commercial tenant allows another business to lease part or all of their commercial premises.
An underlease is granted by a tenant, not the landlord, and is effectively a lease granted out of an existing lease. This arrangement allows another tenant, known as the undertenant, to occupy the property ‘underneath’ the primary tenant. The original tenant remains legally responsible to the landlord after completion under its own lease.
Why Choose to Underlet?
A tenant may wish to sublet for several reasons, including:
- Restrictions on Assignment: Many leases prohibit tenants from assigning part of the premises, but subletting part of the property is more often permitted. This provides a more flexible option for tenants.
- Temporary Vacancy: If a tenant needs to vacate the property temporarily but wishes to retain the right to return in the future, underletting offers a practical solution.
- Reducing Financial Burden: Underletting can provide a way to recover some or all of the rental costs when a tenant no longer requires the full space but remains tied to the lease.
Landlord's Consent and the Role of a Licence to Underlet
Most commercial leases contain a requirement for landlord consent to underletting to ensure the landlord retains a degree of control over the property. If that is the case the tenant will need the landlord’s consent before they can sublet their premises.
A Licence to Underlet is a legal document that formally records the landlord’s consent to the underletting. It sets out specific conditions, including the responsibilities of both the tenant and the undertenant.
Key Considerations for Underletting
When contemplating an underletting, both tenants and landlords should carefully consider the following:
Lease Terms: Both parties should review the head lease to confirm whether underletting is permitted and what conditions must be met. Tenant Liability: If the subtenant breaches any terms in the lease or damages the property, it will be the tenant who is ultimately responsible. It is important for tenants to understand this ongoing liability which is owed to the landlord. Sublease Conditions: The terms of the underlease should align closely with the head lease to prevent conflicts or unintentional breaches. Landlord Approval: Landlord consent is usually required for underletting and is typically formalised through a Licence to Underlet. The tenant should budget for the landlord’s legal costs, as most leases require them to cover these expenses. Without formalising the consent, the underletting could cause issues for all parties. Suitability of Undertenant: Landlords will often request detailed information on the proposed undertenant, including their financial standing and intended use of the property. This helps landlords mitigate risk and ensure that the undertenant is a suitable occupant.
We would always recommend seeking legal advice when considering subletting.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
