Surplus Office Space is Not Black and White

Commercial leases generally contain restrictions on assigning and sub-letting without landlord consent. For some office tenants, the flexibility to address so-called grey space or surplus office accommodation that is held under a commercial lease but not being used, is becoming more important.

In our previous article, Sharing is Caring in Office Leases, we discussed common restrictions/conditions on assigning, sub-letting or sharing occupation in commercial leases, together with compromises that could be negotiated at the outset of a lease to satisfy a tenant’s requirement for flexibility.

Here are some issues which a tenant should consider when reviewing its office space requirements and deciding whether to dispose of some or all of the space it holds under an existing commercial lease.

Consent considered

The restrictions on assigning, sub-letting or sharing occupation without consent that are typically contained in commercial leases serve to ensure that the strength of tenant's covenant is not easily diluted and that the investment value in the property is protected. Landlords presented with applications for consent to assign or sub-let are usually focused on these points.

Assignment v sub-lease – landlord and tenant considerations

Whether an assignment or sub-lease is more appropriate for a tenant will depend on its ultimate intentions in respect of the particular space. Where a tenant no longer requires the office space, an assignment is often the best outcome as the tenant is entirely released from the lease obligations. A sub-lease could be more appropriate where a tenant has additional space that it currently has no use for but may require in the future.

An Assignment is a transfer of the lease and all the tenant’s rights and obligations in relation to a premises (generally the entire premises) to a third party. It creates a direct relationship between the landlord and the assignee.

Given that the outgoing tenant is entirely released from its obligations under the lease post-assignment, a landlord will place a lot of emphasis on ensuring that the assignee is of sufficient financial standing. Landlords generally have the right to require that an entity join the assignment as guarantor in the event that the landlord, acting reasonably is not satisfied with the financial covenant of the proposed assignee.

A sub-lease may be of all or part of a premises. The existing lease remains in place and the tenant remains liable to the landlord under the terms of the lease. While the tenant ultimately remains responsible to the landlord under its lease, notwithstanding it has sub-let all or part of the premises, landlords will still scrutinise applications for consent to sub-let carefully.

A landlord may be aware that if its tenant’s lease is terminated, the sub-tenant will have a direct relationship with the landlord, on the terms outlined in the sublease[1]. On this basis, landlords will generally require the sub-lease to be in substantially the same form as the lease.

In our previous article, The Dangers of a Subpar Sub-Lease in Ireland, we focus on landlords' considerations in more detail. At a very high level, landlords will be focused on:

• Avoiding multiple lettings in a building – leases often have a cap on the number of sub-leases that will be permitted or in some cases a sub-lease of part is not permitted.
• Preventing impact on market rent – landlords often require that sub-lease rent is at market rent but make clear in the lease that sub-lease rents will be disregarded at rent review.

Withholding consent

Most modern commercial leases require that landlords do not unreasonably withhold consent to assignment or sub-letting. Tenants should be aware that in addition to the terms of a lease, Irish landlord and tenant legislation 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.[2]

Conclusion

When considering whether to dispose of office space held under a commercial lease, a tenant should, at the outset, consider the most appropriate means by which to reduce its space and review its lease in detail as regards restrictions and required consents. To prevent delays with the ultimate assignment or sub-letting, we recommend engaging with the landlord early in the process to ascertain its requirements in order to consider an application for consent to sub-let or assign but bearing in mind also the statutory provisions which prevent a landlord from unreasonably withholding consent to an assignment or sub-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.

[1] Section 78 of the Landlord and Tenant (Amendment) Act 1980

[2] Section 66 of the Landlord and Tenant (Amendment) Act 1980