Occupiers of office space often assume that workspace flexibility can only be achieved by using short-term leases or licences, or by negotiating break options. Tenant rights to assign, sub-let, or share occupation of its premises should also be considered.
Commercial leases generally contain tenant restrictions on assigning and sub-letting without landlord consent.
Tenants, particularly fast-growth companies, are becoming more aware that their business plan may change multiple times during the term of a lease. At the point a lease is being negotiated a tenant may not know if it will need all of the space for the entire duration of the lease. For these reasons, inflexible lease provisions on the sharing of the space with others may not be acceptable to a tenant.
While a tenant may want a free reign on the right to assign, sub-let, or share occupation, a landlord will generally insist on certain restrictions so that the strength of tenant covenant is not diluted, it can control who is occupying the space at any given time, and thereby protect the value of its investment.
In general, landlords require that consent is obtained before assigning, sub-letting or sharing occupation. We outline some common restrictions/conditions on assigning, sub-letting or sharing occupation. We also suggest compromises which may satisfy a tenant’s requirement for flexibility and the protections required by landlords.
Right |
Restrictions/condition |
Potential Compromises |
Assignment – a transfer of the lease and all the tenant’s rights and obligations to a third party. It creates a direct relationship between the landlord and third party. |
Deemed reasonable for Landlord to refuse consent/to require a guarantor/surety if assignee is not of equivalent or better standing than the tenant. |
|
Sub-letting – a sub-lease or under-lease of all or part of the premises to a sub-tenant. The existing lease remains in place and the tenant remains liable to the landlord under the terms of the lease. |
Sub-lease of the whole premises only. |
Restriction on number of sub-lets, such as maximum number for the building or per floor. |
Sharing Occupation – generally an informal arrangement where the parties to the lease remain the same. |
Requirement for consent. |
Right to share occupation with group-companies without consent subject to (i) prior notice to the landlord (ii) the occupation will immediately come to an end if the group relationship ceases or if lease is terminated |
Tenants in occupation under existing leases should be aware that if a lease is silent on sub-letting, or assignment or contains absolute prohibitions, this must be read in line with Section 66 of the Landlord and Tenant (Amendment) Act 1980. This provides that assignment or sub-letting cannot be prohibited but will be subject to the consent of the landlord, which consent cannot be unreasonably withheld.
What Next?
Tenants who are keen to preserve flexibility should focus not only on shorter terms and break options, but also more flexible lease provisions on the right to assign, sub-let, licence or share occupation.
If wide-ranging restrictions on the right to assign, sub-let or share occupation are of concern for a tenant, it is important that these restrictions are negotiated at the outset of the leasing transaction and documented in the lease.
For more information on the above and any other enquiries about commercial leases, contact a member of our Real Estate team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
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