What is subletting and can I sublet my premises?

Having leased premises for your practice or business, you may find that you do not need all the space. Under your lease agreement, you may be able to grant someone else an exclusive right to use part of the premises. For example, you may wish to enter into subletting arrangements in order to host complimentary services such as a chemist, physiotherapist, or pathology lab.
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You will note from our other FAQ “What to look out for in a property leasing transaction?” we considered issues around direct leasing. The following information briefly explains some key concepts of subletting, outlines the process involved, and identifies important issues and traps to look out for before entering into a sublease agreement.

Who is who?

The owner of the building or shop is known as the landlord or lessor.  

The doctor or company actually taking the lease is called the tenant or lessee.  

The actual space being leased is known as the premises.  In a subleasing arrangement, the tenant becomes the sub-lessor and the further tenant the sub-lessee.

What is a sublease?

A sublease is where a tenant allows a 3rd party, (in some cases this could even be the original landlord) a right to occupy all of part of its premises for a fixed period of time. It is easily explained by this diagram:

Owner	Tenant	Sub-Lessee
The owner of property being leased is the landlord.  The landlord leases to the tenant so that the tenant can carry on business from the property	The tenant rents the property from the landlord to carry out their particular business. They may not need the whole of the land so they sublet part of the property to the sublessee.	The sublessee rents part of the property from the tenant. The tenant is in effect their landlord. The tenant therefore becomes the sublessor. The sublessee pays rent to the sublessor.

The sublessee’s right to occupy sub-premises is an exclusive right. If it was not an exclusive right to occupy, it would be the grant of a licence to occupy. A licence to occupy is different to a sublease. This short table demonstrates the differences between a sublease and a licence to occupy.

Sublease	Licence to occupy
Provides exclusive use of the sublease space.	Is a non-exclusive use of the sublease space.
Can be registered on title	Cannot be registered on title
Must expire prior to the expiry of the head lease.  If this does not happen there is a technical assignment of the subleased premises to the sublessee.	Can expire on the expiry of the head lease.
Is generally on the same terms and conditions as the head lease except where agreed otherwise.	Can be on any terms but usually has a catch all to say the licensee will not cause the licensor to be in breach of the lease.
Is better to use if the sublease premises is an easily identified defined space.	May be better to use if it is a right to use a non-defined space such as a series of desks or a shared space such as a consult room.

A sublease therefore grants an interest in the title, capable of registration whereas a licence to occupy does not.  Contractually, both a sublease and a licence are enforceable under general contract law but a sublease gives further rights by allowing an interest in the land to pass.

Why would you grant a sublease?

There are many reasons for granting a sublease. One reason is that you may have too much space for your current needs, but do not want to leave it vacant whilst the business grows or you may want to sublet a consultation room to a complementary service provider such as a pathology lab, radiographer or physiotherapist. Care will need to be taken however to ensure that their use of other areas is considered. For example, will your complementary service require a seat at reception? If so, you may need a sublease of the consultation room and a licence over the reception desk.

What is the process?

When considering subletting part (or all) of your premises, follow this process:
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• Check your lease.  Does it actually allow subletting?  Normally a lease will allow subletting but it will do so with restrictions.  Often you will need to obtain the head landlord’s consent.
• Advertise the sub-premises for lease. You may need to engage an agent and pay advertising expenses and a commission to the agent. At this time it is worth having a conversation with your head landlord to let them know your plans.
• When a suitable sublessee is located, let your head landlord know and provide preliminary details.
• Agree a form of sublease document with the sublessee. Again, check your head lease on this point, as there may be certain conditions that must be included. Once your sublease is agreed with the sublessee, you will need to get that sublease approved by the head landlord.
• Also consider if you need a survey of the premises to identify the sublease premises.
• The head landlord will let you know if it requires any changes to the sublease document and normally also require that all parties enter into a deed of consent to sublease. The deed of consent to sublease is a document between the head landlord, you (the tenant) and the sublessee. The deed of consent to sublease will normally provide for the payment of the head landlord’s costs and set out what happens in the event of termination of your lease. This process is often slightly different in Victoria where you will enter into a deed of consent and sublease. The difference here is that in Victoria leases are not registered.
• Once consent is provided proceed to register the sublease in the usual way.

When taking a lease, it is prudent to ensure subletting is permitted with as few restrictions as possible. You may wish your lease to provide that you can sublet to a specific category of potential sublessees without first obtaining consent.
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Note, under your lease, you will likely have to obtain landlord consent to grant a licence to a proposed occupier as well.

What are some of the traps when subletting?

A sublessee has the ability to enjoy the sub-premises in full so it is vital to ensure all of their obligations are met. Care needs to be taken when drafting to ensure:
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• All costs are passed on.  Make sure any outgoings are passed on.  If a sublease disclosure statement is required, make sure this is done.
• Make sure all other costs payable under the head lease are recoverable.
• Make sure the sublease expires prior to the head lease.  If this does not occur it can become an assignment of lease meaning you lose any reversionary interest in the property.
• You should make sure any sublessee (or licensee for that matter) provides sufficient security by way of rental deposit or bank guarantee as well as a certificate of currency for public liability insurance.
• Ensure make good is required if that is what is needed.  Subleases are often for the term of the head lease less one day.  This is not going to leave enough time to carry out a make good under the head lease.

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