Underletting – an option for unwanted commercial space

05 Oct 2021

If you have a lease of commercial premises, you may be interested in disposing of some or all of your premises. In a separate article we discussed the option of assigning a lease. Underletting (also known as sub-letting) is an alternative route.

Underletting means you become a landlord to an undertenant. Your undertenant may take some or all of your premises and they will occupy on the terms of an underlease that you and they enter into. 

It is important to appreciate that you remain the tenant to your landlord and you still have to comply with the terms of your own lease. In practice you will most likely push those obligations onto the undertenant, but ultimately if they fail to perform, the liability is yours.

There are some key issues you need to be aware of:

  • You need to review your lease to understand whether underletting is permitted, and if so, the terms on which it is permitted.
  • You need to be satisfied that your undertenant is going to be able to pay the underlease rent and comply with the terms of the underlease – if they breach the underlease (for example by letting the premises fall into disrepair), this is likely to be a breach of your own lease and you will have to remedy that breach at your own cost and try and recover the cost from your undertenant.
  • You will need your landlord’s consent to the grant of the underlease – the landlord will want to know who the proposed undertenant is and will want to see and approve the form of underlease. If granted, the landlord’s consent would be documented in a Licence to Underlet.
  • The underlease cannot be for a term which ends after the date of your own lease.
  • The rent you charge will almost always have to be the open market rent, and in some cases the same as your own rent (or a due proportion of it).
  • The underlease will normally have to be in a similar form to your own lease.
  • If your landlord is not convinced that the undertenant will be able to comply with the terms of the underlease they may have the right to ask for a guarantor to guarantee the undertenant’s obligations and indemnify your landlord for any losses it may suffer.
  • Many commercial leases prohibit underletting of part – landlords often don’t want their buildings being divided up into too many parcels.
  • If you are underletting part, you will probably need your landlord’s consent to the works necessary to divide up your premises, this would be documented in a Licence for Alterations.
  • You will need to pay your landlord’s costs for any Licence to Underlet and Licence for Alterations, typically these can range from £1,000 - £2,000 + VAT per document. A landlord may also have surveyor’s costs which you will need to meet.
  • If your business bankers have security for lending from you, their consent will invariably required as well for any subletting.

How can we help?

We can help you through this process, from reviewing your own lease to understand what is and isn’t permitted and applying for landlord’s consent to negotiating the underlease and agreeing the terms of the landlord’s licences. 

For further assistance and support, please get in touch with your usual Real Estate contact at DMH Stallard or with Tom Watkins by email or by phone on 020 7822 1571.

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