Key considerations for approving subleasing arrangements
Whenever the economy tightens, subleasing commercial, industrial and retail property inevitably has its moment. For fund managers, the current market presents challenges and strategic opportunities as many businesses are looking to sublet all or part of their space to reduce costs or generate income from underused floor space. Subleasing can be a smart tactic, but it comes with complexities and risks that are easy to underestimate. Before you approve or facilitate subleasing arrangements within your managed assets, here are the key things to consider. Dividing your space is more complex than it looks
If you’re splitting your premises between two or more subtenants, you’ll need to work out how shared areas such as loading docks, hard stands, car parks, amenities and fire exits will be used and how occupancy costs will be divided. These details can cause friction between subtenants if not sorted out upfront – or worse still, you could be subsidising another business’ operating costs.
Your make good obligations can add up
If required under your head lease, you remain responsible for restoring the entire premises at the end of your lease, no matter what your subtenants have done during their term. If a subtenant leaves without removing their fit-out, you may be left to deal with the obligations under the head lease. We recommend drafting defensively so that the sublease clearly spells out each subtenant’s make good obligations from the outset and any security held is sufficient to cover these obligations.
Head landlord’s consent matters more than you might think
Most leases require head landlord approval before subletting, and this is rarely just a formality. Head landlords are increasingly scrutinising proposed subtenants, particularly in the industrial sector where some uses are considered high risk. Going to market without understanding what your landlord will approve may lead to deals falling through when unexpected, non-negotiable conditions are imposed late in the process.
What your subtenants can use the space for
The permitted use under your head lease may be narrower than you expect. This is particularly relevant if your subtenant wants to store lithium-ion batteries or run 3PL logistics operations activities that raise real concerns for both landlords and insurers due to fire risk and compliance requirements. These issues must be resolved before doing a deal – not after.
Does the Retail Leases Act apply to your arrangement?
Retail leasing regimes may apply to a sublease even if they do not apply to the head lease. For example, in Victoria, a sublease can be classified as a retail lease under the Retail Leases Act 2003 (Vic). If the Act applies, the additional obligations apply to the sublease, including providing a formal disclosure statement before the sublease is signed, and restrictions on which costs you can recover from your subtenant (for example, you cannot charge your subtenant for land tax even if you have to pay under your lease).
Non-compliance can result in penalties, entitle your subtenant to a minimum lease term of five years or give your subtenant the right to end the lease. If there is any chance the Act applies to your arrangement, this should be considered before heads of agreement are signed.
Sublease or assignment? They do different things
An assignment transfers your entire lease to someone else, and you step out (although you may retain some ongoing liability depending on the terms of your lease). A sublease means you retain your lease and remain fully responsible to your landlord throughout. If you’re negotiating as a subtenant, consider requesting a direct agreement from the head landlord to protect your occupation if the head lease comes to an end.
You’re still the tenant, even when you become a sub-landlord
Subleasing does not reduce your obligations to your landlord. Rent, outgoings, compliance and restoration all remain your responsibility. If a subtenant causes damage, breaches use conditions or triggers an insurance issue, you bear the potentially expensive consequences.
How we can help
Subleasing can be a genuinely effective strategy in the right market, but only when approached carefully and thoughtfully. Our expert team is here to help you plan ahead, structure the arrangement correctly, and move forward with confidence. Please get in touch if you require any support.
