As we change the way we use property for business, sub-leases may become more commonplace.
A lease is a contract between a property owner and a person wanting temporary use of the property, in exchange for rent. This person is named on the lease and is referred to as the head tenant
The head tenant may then seek to sublet some, or all, of the premises to third parties. For example, an owner of a pharmacy might sublet part of the premises for various activities, such as the business of a podiatrist or beauty therapist. Such third parties are referred to as sub-tenants. Their name may not appear on the lease.
There are a few things to bear in mind, as either the landlord or tenant:
As with most agreements, a sub-lease can be created orally. This inadvertently leads to problems if the relationship dissolves. Head tenants can avoid issues through the use of a written agreement.
The agreement should specify: the space that has been sublet, the term, the rent, permitted use and each party’s rights and obligations.
Any sub-lease agreements involving third parties should consider the rights of the property owner and seek their written consent. Obtaining consent prior to sub-letting the property may in fact be a condition of a tenant’s lease. Consent of both the head-landlord and the landlord’s bank may be required.
All states have Retail Tenancy Legislation, which governs minimum terms, rent reviews, options, outgoings and disclosure. It is important to remember that both oral or implied lease agreements, or even a licence, may be regarded as a lease under the Legislation.
It is essential that the tenant and sub-tenant operate separate businesses. This must be recorded somewhere. The customers, authorities, landlord and employees should also be aware of the arrangement. Authorities have held head-landlords responsible for bad or unlicensed conduct by a tenant.
Sub-tenants should have certain insurance cover, which should be specified in the agreement. A certificate of currency of insurance should be provided to the head-tenant. Head-tenants should ensure that their sub-tenant’s activity doesn’t affect their own insurances.
The landlord’s insurance should be compatible and not offend the tenants’ insurances. There should be discussion between the parties as to what coverage is needed.
Importantly, a sub-tenant must be made aware of any industry and general requirements affecting the premises. The local council may be helpful in obtaining additional information. The premises may be subject to restrictions on hours of operation, the number of employees, noise, fire, safety and parking. If planning approval is required, the application could take a number of weeks to process. Planning approval may be required even when no building works are involved. Where building alterations are proposed, more time should be allowed to obtain the necessary permit.
Ultimately, sub-letting involves risk. Business advisers, including accountants and lawyers, should be involved in the process to ensure that rights and obligations are respectively protected and honoured.
For more information:
p: (03) 9620 2001
The advice provided in this blog is intended to be general advice only and should not be relied upon.