Understanding Your Risks When Subleasing Commercial Property
Considering leasing a commercial property to operate your business in? For many business owners, leasing a commercial space represents a significant financial commitment. This is why it is important to conduct a lease review prior to signing an agreement. When your real estate agent finds you the ideal commercial space at below market rates, you may discover that you are actually dealing with a sublease. Subleasing can be a cost-efficient solution, particularly when the current tenants are eager to move out. However, sublease agreements are inherently risky. Read on to find out why.
What is Subleasing?
When a tenant is subleasing commercial property to a subtenant, the tenant is temporarily transferring lease rights to the subtenant until the sublease term is over or until the tenant returns to the space. Unless otherwise stated, when subletting, the tenant is liable for payment of rent and repairs to the property during the term of the head lease. The head landlord may be responsible for structural repairs to the property.
Why is Subleasing Commercial Property Risky for Subtenants?
A sublease agreement has inherent risks due to their existence depending on the head lease. In the event that the head lease is terminated, any subleases under it are also terminated unless otherwise stated. In other words, even if a subtenant is in good standing, they may find themselves locked out of the premises because the tenant defaulted on rent payments. Depending on the agreement, a landlord may have the right to terminate a subtenant’s lease without providing any notice.
Obtaining the Landlord’s Consent
Before signing a sublease contract, it is important to ensure that the head lease allows the tenant to sublease the premises. Because landlords have an interest in knowing who their subtenant is, most head leases restrict subleasing unless the landlord signs a consent agreement. Failing to obtain consent from the landlord prior to signing a sublease may lead to the landlord filing an application to evict both the tenant and the subtenant.
Permitted Uses for Subleasing Commercial Property
Before signing a sublease agreement, check the permitted uses of the sublease property. This will be stated in your sublease contract. It is important to do this to ensure the agreement fits your business needs. Be sure to review any applicable zoning bylaws that may restrict your use of the land. Further, you should do a title search of the premises. The title search will show if there are any registrations on title.
Understand the Costs for Subleasing Commercial Property
As a subtenant, you should review the subtenant agreement to understand how much rent you will be paying. In addition to paying your rent, you may also have to pay operating costs and utilities. In landlord friendly leases, the landlord may have the right to amend any of the terms in the sublease and to request for additional financial security which can result in a larger financial commitment than originally anticipated.
Termination of a Lease
There are various ways you can protect yourself from the automatic termination of your sublease if the head lease is terminated. One way to do so it to obtain an agreement from the head landlord stating that you can continue to rent the premises under the sublease terms irrespective of termination of the head lease. Alternatively, rather than facing immediate eviction, you may ask the head landlord to agree to provide you with the ability to stay on the premises for an interim period if they terminate the head lease.
Failure to Pay Rent
In the event that the tenant fails to pay the rent to the head landlord, your ability to stay on the premises as a subtenant may be jeopardized. It is important to negotiate the sublease with the head landlord to guard against this risk. For example, you may ask the head landlord to give you written notice if the tenant defaults on rent payment. Doing so would provide you with notice that the head lease may be terminated. It also allows you to begin negotiations with the head landlord to make alternative arrangements to lease the premises.
To minimize the risk that your sublease rent is diverted from the landlord, you may also wish to make arrangements with the tenant and the landlord to ensure that the sublease rent flows directly from you to the head landlord.
Subtenants Have No Greater Rights Than in the Original Lease
Subtenants should understand that the tenant they are leasing from cannot grant them any rights that are not in the head lease. Practically speaking, this can make a difference when:
- a subtenant is unable to obtain rights to signage or parking in the common areas of the premises when the tenant does not have a corresponding right in their lease. Even if the tenant had such rights in their lease, they may be personal rights meaning that the tenant cannot pass on the rights to the subtenant; and
- the tenant cannot grant the subtenant a term that exceeds the term of their lease.
If a subtenant wishes to include rights that are not in the tenant`s lease, the subtenant ought to negotiate such rights with the landlord and ensure they are in the subtenant agreement prior to signing.
Help with Reviewing Commercial Leases
Subleasing commercial property can be a complicated and risky endeavour. This article highlights a few of the risks inherent in a sublease agreement. There are many other issues you should consider. At Kahane Law Office, our corporate lawyers have experience as leasing advisors. We can assist you with reviewing commercial lease agreements. Whether you are a landlord, tenant, or subtenant, retaining legal assistance is a smart decision. We can aid you in your lease negotiation process and help you reduce any risks. For fast, friendly and cost effective solutions, call us toll-free at 1-877-225-8817 (or 403-225-8810 locally in Calgary, Alberta), or email us directly here.