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David Ashton

Partner - Uckfield

How should landlords approach sub-letting to tenants in a post covid-19 environment?

Whilst many others during lockdown have had the opportunity to indulge in more house bound online activities to look after our wellbeing, we should consider taking this further to adapt ourselves to post lockdown.

To use the yoga analogy the relationship between landlord and tenant needs to be less like “the plank” and more about getting the balance and flexibility right.

Many businesses will have been reflecting on their property needs in view of the new working arrangements. They will be expecting greater flexibility from their landlords to enable them to be able to adapt either to the new economic climate or life/balance needs.

Although break clauses and length of leases can be priced into the rental levels, landlords appear to be reluctant for sub-lettings in particular sub-lettings of part.

Whilst the likes of “We Work” and “Regus” offer inclusive and flexible terms, these working arrangements are not suitable for every business and the current times have highlighted that the “business models” used by these operators also have their downfalls. There is greater reliance being placed on charging for the “add-ons ” and other services these operators offer in order to make their margins.

Not every property lends itself to be able to be divided into separate areas in order to satisfy security, confidentiality or health and safety concerns, but there are advantages both to landlord and tenant in allowing greater flexibility in the terms of their lettings.

There has been a reluctance for freeholders or superior landlords to have any involvement with the sub-tenants of its property. Now might be the time to have a different approach and embrace the change in attitudes toward property requirements and adapt to the new “climate”. Superior landlords are also nervous about shortfalls between the head-lease rent and rents coverable under any sub-lease(s).

There may well be additional administrative burden on the landlord (but management costs can be recoverable under service charge provisions where appropriate) but there may well be advantages in having direct control and there is a variety of “tools” that a landlord has in particular with sub-tenants.

By way of example a landlord should consider the following:

  • The quality of the sub-tenant – control is still maintained as landlords consent to sub-let will be provided for in a properly drawn lease.
  • Direct contractual relationship with the sub-tenant can be set out in the licence to ensure the superior landlord can enforce the sub-tenant’s obligations as set out in the sub-lease.
  • A superior landlord can impose obligations on its own tenant to provide remedies to any breaches by the sub-tenant and the tenant can remain liable.
  • Section 81 of the Tribunals Courts Enforcement Act 2007 gives a superior landlord the right to recover rent and enforce rent arrears in respect of commercial property (commonly known as CRAR, Commercial Rent Arrear Recovery). If the tenant is in arrears (it must be an amount at least equivalent to seven days rent). The superior landlord can serve a Section 81 Notice on the sub-tenant and after the expiry of fourteen clear days the sub-tenant is then treated as the immediate tenant of the superior landlord. The sub-tenant will then be required to pay the rent directly to the superior landlord. The superior landlord is also entitled to take enforcement action under CRAR (most of the enforcement terms of which have been temporarily suspended due to COVID19).
  • The rental sum of the part could be more than the rent the head-lease. The aggregate of the rent under the sub-leases could be more than the rent paid under the head-lease.
  • If the tenant becomes insolvent and the head-lease is disclaimed the sub-tenants rights remain (the superior landlord can still forfeit the head-lease if the usual insolvency provisions are set out in the head-lease or there are rent arrears) unless the head-lease is forfeited then the sub-lease is forfeited. However, a sub-tenant does have the right to claim relief against forfeiture.
  • If the sub-tenant claims relief against forfeiture they will be required to pay the rent of the head-lease and comply with its terms.
  • A properly drawn head-lease should include provisions that:
    • Prohibit a sub-lease being granted for a premium or fine so that the rent amount is not distorted.
    • Avoids the under-lease having rights over property not included in the head-lease.
    • Have rent reviews on the same dates as the head-lease.
    • Avoids different repairing obligations to those set out in the head-lease.
    • Prohibits variations.
    • Prohibits any further under-lettings.
    • Ensures that all sub-lettings do not have the protection of the Landlord and Tenant Act 1954 in that the sub-tenant does not have an automatic right to renew the lease.

Perhaps only time will tell as to whether landlords and tenants are prepared to strengthen their relationship for the benefit of them both as they might see greater flexibility to accommodate the economic business needs of both parties.

Contact us

David Ashton is a Partner in Rix & Kay’s Commercial Property Team and has over 30 years’ experience of advising landlords and tenants on complex lease negotiations. For an informal chat and more information contact David e. t. 01825 745 366

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