In these straightened times, many tenants are considering sub-lettings of whole or part in order to reduce overheads. However, most commercial leases provide that any sub-lease of the premises must be at no less than the rent payable under the tenancy. This can cause a problem for tenants of properties whose rents were fixed at a time when the property market was buoyant, and who are attempting to sub-let in today’s market.
CONSEQUENCES OF GETTING IT WRONG
Some tenants may take the risk and sublet at less than passing rent in breach of the lease provisions, leaving themselves open to the following remedies available to the landlord:
- forfeiture of the lease – probably unlikely again due to the present market;
- a claim for damages, potentially including future damages such as loss of rent1 and damage caused by the sub-tenant2, from the tenant;3
- the seeking of an injunction against the tenant preventing the completion of the sub-lease;
- the seeking of an order from the Court that the sub-tenant is to surrender the sub-lease.
In addition, if the landlord can prove that the sub-tenant was aware that the premises were being sub-let without the necessary consent, the landlord may claim damages from the sub-tenant for wrongful interference with the headlease.
WAYS ROUND THE DIFFICULTY
- The Side Letter It used to be common practice for tenants whose leases were subject to a provision against sub-letting at less than the passing rent, to enter into a sub-lease at full passing rent and enter into a side-letter with the sub-tenant to reduce the actual rent payable. This practice was effectively ended by a 2002 Court of Appeal case4 which held that the side letter and sub-lease were interdependent documents and had to be read together. When read together, the two documents clearly had the effect that the sub-lease was at less than the passing rent, and the tenant was found to have breached the terms of the lease. This is therefore no longer a viable option.
- A Reverse Premium Where a lease permits it, the tenant may be able to set up a reverse premium. In one recent case,5 the sublease showed the passing rent under the headlease as payable, but the tenant placed a sum of money into an escrow account, which released periodic payments to the sub-tenant, equal to the difference between the passing rent and the rent agreed between the tenant and the sub-tenant. This was held to be part of a genuine transaction and not a breach of the covenants not to sublet at less than the paying rent. The major drawback to this type of arrangement from the tenant’s point of view is that the tenant would have to have access to the necessary capital which could be tied up for the duration of the sub-lease.
- An Indemnity The sub-tenant could be indemnified against paying the full passing rent by a party other than the tenant. This alternative has not yet been the subject of a judicial decision; however it has been getting judicial consideration6 and it is currently understood that such an arrangement would not be a breach of a covenant not to sublet at less than the passing rent, even if the third party were associated with the tenant. This would appear to be an acceptable solution for many tenants, the only risk being that it has not yet have been judicially approved.
- Waiver of the Provisions A tenant can always approach the landlord and ask him to waive the provision of the lease which prohibits sub-letting as less than the passing rent. On 20 April 2005 the British Property Federation issue a declaration on sub-letting in which several major landlords - including British Land, Land Securities and the Crown Estate - agreed to waive the restrictions on sub-letting at less than the passing rent in their lease except in five exceptional circumstances.