The practical steps you can take when you have too much office space 

 

In these changing times, companies are starting to reassess their office space requirements due to more people working from home and a reduced office headcount.

The commercial deed of lease records the legal obligations between the Landlord and Tenant and typically provides two mechanisms for Tenants to deal with surplus space.

A sublease is used where part of the tenancy is leased to a third party. The Tenant effectively becomes a Landlord to the new Tenant who is taking on part of their premises. Where a new Tenant takes over the entire lease an assignment is often used. Though not documented in the deed of lease sometimes a third mechanism can be used where a lease is entered into with the Landlord and the new Tenant allowing the existing lease to be surrendered.

Aspect

Sublease

Assignment

Surrender

Landlord
(legal term)

Head Lessor

Landlord

Landlord

Existing Tenant (legal term)

Sublessor

Assignor

Tenant

New Tenant
(legal term)

Subtenant

Assignee

Tenant

Effective date

Sublease commencement date

Assignment date

Surrender date

Premises

Part or entire premises

Entire premises

Part or entire premises

Duration

Any duration up to the next renewal date.

Can be shorter

Up to the next renewal date

New Tenant enters into lease beyond the existing lease term

Rights of renewal

Often nil, but can be provided so long as renewal doesn’t go beyond next renewal date in the head lease.

As per the original deed of lease

As per new deed of lease

Communication protocol

Subtenant to Sublessor. Sublessor to Landlord. Subtenant shall not talk to the Landlord

Assignee to Landlord

New Tenant to Landlord

Rental payments

Subtenant to Sublessor. Sublessor to Landlord

Assignee to Landlord

New Tenant to Landlord

Existing Tenant guarantee from date of sublease/ assignment/surrender

To the Landlord on 100% of the rental up to renewal date

Assignee is liable to pay rent, however in case of default, the Assignor is still on the hook, generally up to the next renewal date. Landlord effectively has two Tenants guaranteeing rental up to renewal date

Ends on surrender date

Tenant fitout

Still owned by Sublessor. Changes required by Subtenant will need Sublessor and Landlord approval

Typically sold to the Assignee for nil or nominal value

Passes to Landlord as part of surrender

Make good

Not required by Sublessor until Lease expiry.

Subtenant may need to make good changes they make to their subtenancy and return to the condition as the start of the sublease

Obligations pass to the Assignee.

Typically incorporated into surrender payment to Landlord

Current financial year implications

Existing fitout on the balance sheet is still written off over the remaining term of the lease while in occupation

Existing fitout on the balance sheet needs to be written off in the current financial year

Existing fitout on the balance sheet needs to be written off in the current financial year

Required legal documentation

Agreement to sublease, then deed of sublease plus an attached copy of the head lease. New sublease documents should be in the same form as the head deed of lease

Agreement to assign lease, then deed of assignment. A copy of the deed of lease should be attached

Agreement to surrender, then deed of surrender

Default by Tenant

If Sublessor defaults, the Landlord can terminate the head lease and sublease. Key concern for Subtenants is tenure in case of default

Default by the Assignee means the Assignor is still on the hook, generally up to the next renewal date. Landlord effectively has two Tenants guaranteeing rental up to renewal date

 

Landlord approval

Required for sublease but cannot be unreasonably withheld

Required for assignment but cannot be unreasonably withheld

Required for surrender and can withold approval as they don’t need to agree to surrender. Any lease surrender has to work for the Landlord

Legal costs

Sublessor to pay the Landlord’s costs.

Every other party to pay their own

Assignor to pay the Landlord’s costs. Every other party to pay their own

Each party to pay their own

 

Other Considerations

Is a landlord's consent required? 

The deed of lease will specify that the Landlord must consent to a sublease or assignment. Typically the Landlord requires any Subtenant, Assignee or new Tenant to prove to the satisfaction of the Landlord that the Tenant is respectable, responsible and has the financial resources to meet the tenant’s commitments under the lease.

While the onus is on the incoming Tenant to prove this to the Landlord, the Property Law Act 2007 prohibits the Landlord from unreasonably withholding or delaying consent to an assignment or subleasing of your lease. If you fail to get the Landlord’s consent then you could be in breach of the lease.

What if there is a change in business use?

If the premises are being used for a different business use by the Subtenant, Assignor then that new business use must be disclosed to the Landlord as part of obtaining their consent and recorded in the relevant legal documentation.

Sublease tips and tricks

The Tenant/Sublessor remains solely liable to the Landlord for the lease of the entire premises, even if a portion of the tenancy has been subleased.

Documentation is key, and a copy of the head lease between the Landlord and Tenant/Sublessor should be attached to the sublease documents. The head lease and the sublease should be in the same form where there is no conflict in clauses. For example, if there is a no-access clause in the head lease due to an earthquake, then the same clause should be in the sublease. You would not want a Subtenant working from the premises if the Head Tenant cannot provide access. A Subtenant should not sign a sublease agreement without having reviewed the head lease first.

With subleasing there is also scope within the sublease for both Landlord and Sublessor to seek a guarantee of the performance of the Subtenant. These can range from personal guarantees to bank bonds and charges. Sublessors should have the same requirements to be satisfied with the financial resources on their Subtenant as the Landlord does with them.

A plan showing the dedicated area and common area for the Subtenant should be identified along with any allocated car parks, signage or other rights. Further, a premises condition report completed at the start of the sublease will help avoid any issues with make good requirements at the sublease expiry.

Get the right approach upfront

Read your deed of lease to determine what you can and cannot do. You should also consult your preferred real estate agent, lawyer, fitout company and your Landlord to determine which of these solutions will work best for you.

With office space, sometimes there can be a physical or financial constraint to your preferred solution. For example, you want to remain in your tenancy and find a Subtenant for part of your tenancy. Most Subtenants want dedicated space with a kitchen, meeting rooms and computer cabling.

The last thing you want to do is find a Subtenant who is ready to move into your tenancy only to learn that the cost to install separate walls and a kitchen will trigger compliance of fire egress and disabled access under the building code plus require a building consent and may negate any costs savings you had anticipated.

Before you market your space, consult your team and please spend the time to determine the right course of action upfront.