We are increasingly seeing tenants focus on their rights to sublet to give them a degree of flexibility. That is across all sectors, but particularly office and retail as a result of the pandemic changing both working and shopping habits. Whilst the focus may be from the tenant side, there are several points for the landlord team to consider.

Test for landlord's consent: as the tenant remains in place and the landlord continues to rely on its covenant, the sub-lease consent test is likely to be slightly lower than for assignations. However the landlord needs to be mindful of the potential covenant of the subtenant. Our recent article on the test for landlord's consent is worth bearing in mind here (see Application for landlord's consent under a lease – a two-stage test? | Brodies LLP).

          If the tenant's covenant is important to the landlord and it does not want to see that diluted, then it needs to consider what covenant tests it wants to place on potential subtenants. There is no hard and fast rule here – it's very much based on the circumstances of the first tenant.

          Do bear in mind however a slight divergence in the law between Scotland and England. In England, subtenants may have a statutory right to remain in occupation notwithstanding that the landlord has terminated the head lease (e.g. due to head tenant breach/insolvency). In Scotland, in the absence of express agreement otherwise, "irritancy" of the head lease means that the sublease falls automatically.

          So, a Scottish landlord is perhaps less likely to find itself directly bound to a subtenant. It is therefore not at all uncommon to see a simple (non-covenant-related) test that the proposed subtenant is "respectable and responsible".

            Rent: allowing a rent lower than market rent is unusual as it could have a negative impact if the lease has OMV rent reviews, unless the sublease rent is disregarded. Bear in mind that requiring the sublease rent to be the higher of market and passing lease rent could be seen as onerous at lease review. If rents have trended downwards that could make it more difficult for a tenant to sublet, making the lease less marketable.

            Subletting in part or whole: are the premises suitable for partial subletting or are there reasons why that might be prohibited (e.g. the lease demise is a single office floor or retail unit which can't be configured to have a separate access)? That is a case by case analysis but should be done so the lease reflects the reality of what is possible. That may mean bespoke provisions on subletting: a subletting clause may require the tenant to carry out works to ensure the sublease demise has its own entrance and with retail units, its own servicing route. The landlord needs to decide what degree of control / test for its consent it wants over such works. Such a provision in the lease subletting clause then needs to tie in with the lease permitted works clause.

            Cap on the number of subleases: if subdividing the unit is possible, then consider if a limit on the number of sublets is appropriate. Usually seen with retail units, the landlord may want to ensure that an anchor / high profile tenant remains the main trading entity and presence at the premises. Limiting the number of partial subleases in that situation needs to be considered alongside any tenant rights to share occupation with franchisees or concessionaires: ensure you don't accidentally reduce the tenant's overall presence by permitting a certain amount of subleases and a certain amount of concessionaires that together would occupy the majority of the retail space.

              There may also be tenant specific requirements. We have seen JV entities wanting to be share occupation with their JV partners or others involved in the JV such as contractors. That's particularly the case with JVs delivering infrastructure projects and looking to create a co-located integrated working environment. Whether that arrangement is permitted as subleases or sharing occupation needs to be considered. The net result may be a sharing occupation arrangement under the assignation clause rather than permitted subleases, but it needs to be thought through.

              Sublease mirroring the lease: while it may seem simple to require the sublease to be on the exact same terms as the lease itself, that needs to be carefully considered. Is there any provision of the lease that is not appropriate to replicate in the sublease? They key one is tenant insures leases. Replicating all of the tenant's lease obligations in the sublease means there may be a double insurance issue: the subtenant has to insure under the sublease and the tenant has to insure under the lease. The risk is that if there is insured risk damage, each insurer may point to the other and say 'they can pay out'. The net result being that neither insurer may do so. The landlord does not want to be in a position where there is damage that is not being remedied because of such a stalemate.


                Elizabeth Ward

                Legal Director