We have seen an increase in businesses optimising the use of their business premises by renting out an office space or area that they own or lease. Or perhaps your business is no longer viable and you’re stuck paying a lease which you no longer need. Whilst sub-letting and licensing is a great way of securing some regular income and assigning the lease can relinquish you of your financial obligations, it’s important to have an agreement in writing which distinguishes whether you are assigning, sub-letting or licensing:
- Sub-let with the landlord’s permission;
- Assign the lease with the landlord’s permission; or
- License to occupy which usually does not need the landlord’s permission.
In this blog we talk about the difference between these options: assigning, sub-letting and licensing.
Sub-letting
Sub-letting is more common for commercial property tenants who have unused space or no longer need to use the premises. The agreement is between the new tenant and the existing one. But, in most circumstances, you do need the landlord’s permission to sub-let part or all the premises to a third party.
A sublet is different from a lease assignment. In a lease assignment, you are no longer the tenant of the property. Therefore, the new tenant is liable under the lease and needs to meet all the obligations and responsibilities which the lease places upon them*. Whereas a sub-let means you remain liable under the lease you have with your landlord.
You will need to refer to your lease to find out what the exact terms are in relation to sub-letting as every lease is different. Some leases allow you sub-let in part but not the whole of the premises. Whilst other prohibit sub-letting entirely.
If you are allowed to sub-let, you must make sure the subtenant you choose agrees to and respects the terms and conditions of the head lease (the lease you have with your landlord). It is therefore important that you have a lease in place with the sub-tenant which mirrors the responsibilities and obligations that are placed upon you in the head lease.
Assigning
Assigning a commercial lease to a third party is more common when the current tenant has to relocate or sell their business and no longer needs the premises. Or in cases where you need to end your lease earlier than intended.
If the current tenant wants to terminate the tenancy before the end of their lease. They can legally transfer the lease to a third party. By transferring the lease, the original tenant transfers all the responsibilities to the new tenant or “assignee”. The transfer becomes valid when all concerned parties sign a transfer of lease and deed of consent.
*However, the landlord may also ask you to sign an Authorised Guarantee Agreement. This contract makes you liable for any potential lease breaches the new tenant makes. This is becoming more common in order to minimise the landlord’s risk as a result of the assignment.
While both sub-letting and assigning require the landlord’s permission consent may not be unreasonably withheld. It is prohibited by law to do so.
Licensing
Whilst sub-letting and assigning a lease both need the landlord’s consent licensing, in most circumstances, does not. This is why it is a more attractive option if you want a quick way to rent out part of your premises. This is quite common in the beauty and hairdressing industry, whereby a hairdresser, barber or beauty therapist rents a chair in a hair salon or a treatment room in a clinic. However, it’s becoming increasingly popular in other industries to such as hot-desks in office spaces.
If you are going to licence an area of your preminses you must have a license agreement in place. This establishes that the relationship is a licence to occupy rather than a lease. Having a formal agreement in writing will keep you protected and free you from liability should there be a dispute down the road. However, simply having this stipulated in a licence agreement is not sufficient to determine what is a licence and what is a lease. It’s equally important ensure that the person licensing the space does not have exclusive use of the area. Or, move them around within the premises to different locations.
What should you include in the licence agreement?
A formal agreement between a licensor (the tenant or owner of the premises) and a licensee (the person renting the space) should include specific sections to make it legal and valid. These include the following:
Monthly rent
Policies
Duration of licennce
Terms & Conditions
Do get in touch if you have any legal concerns regarding licensing, subletting and assigning, and which one is going to be right for you. We would be happy to help. We have supported many businesses in this process. Whether that’s reviewing the lease, drafting licence agreements and negotiating with the landlord or their representative to ensure a fair outcome.