A reported 52% increase in year on year lettings means 2019 is likely to be a busy time for landlords, whether entering new leases or acquiring assets with leases already in place.
The primary concern of a landlord is the protection of their investment and in this regard the quality of the tenant is key. While a landlord will often go to great lengths to confirm the financial strength and proposed use of their principal tenant, important thought must be given to the issues arising from the tenant’s right to alienate the lease.
While many of the considerations will be similar, this article will concentrate on the issues arising from a proposed sub-lease as opposed to an assignment, the latter being a transfer of all the tenant’s rights and obligations to a third party and which creates a direct relationship between the landlord and third party. The former is a new lease between the tenant and a third party where there may not be a direct relationship between the landlord and third party.
Consent to sub-lease
A landlord’s first port of call when asked to consider an application to permit a sub-lease will be the lease terms. This will often provide for limitations on the tenant’s right to sub-let and set out conditions to be satisfied prior to any consent being provided.
These would often include:
- That any sub-lease can be of the whole demise only – this will protect a property which is not designed for multi-lets
- The provision of full financial information including (if a company):
- Company constitutional documents
- Trade references
- Bank references
- Accounts for the last three years
- If a new entity with no financial records, a possible guarantee (personal/parent company/bank) or rent deposit
- A condition that the rent reserved under the sub-lease be the higher of the passing rent under the lease or the market rent then attainable – a landlord will want to ensure that a new rent does not adversely impact future rent reviews
- A disregard in the lease’s rent review clause (if any) in relation to any rent charged under the sub-lease
- A condition requiring the sub-tenant to enter a direct covenant with the landlord to comply with the covenants and conditions in the lease – this will provide a direct contractual relationship between the landlord and sub-tenant and will enable the landlord to enforce the covenants and conditions directly if necessary
- A condition that the sub-tenant will execute a deed of renunciation – this will ensure that the sub-tenant does not gain statutory rights to renew their lease
- A condition that the tenant or sub-tenant will meet the landlord’s legal costs in relation to the consent process
If the lease is silent on sub-letting or contains an absolute prohibition on the sub-letting of the whole of the demise, this must be read in line with Section 66 of the Landlord and Tenant (Amendment) Act 1980, which provides that same cannot be prohibited but will be subject to the consent of the landlord, such consent not to be unreasonably withheld.
What is deemed to be unreasonable will depend on the facts of each case. The onus will be on the tenant to show that the landlord is being unreasonable and the test will be an objective one, that is, that of a reasonable landlord.
The landlord must not act arbitrarily and must actually consider the merits of the tenant’s request. The following could be deemed to be issues for which consent could be reasonably withheld:
- Poor financial strength of the proposed sub-tenant – is the sub-tenant strong enough to perform their obligations under the lease?
- The proposed use of the property by the sub-tenant – the landlord has a legitimate interest in ensuring that the property is used in a legitimate way and not one which could damage the value of the property. In considering the use the landlord would also have to act reasonably
Termination of the lease
The importance of ensuring a suitable sub-tenant is necessitated by Section 78 of the 1980 Act.
This provides that where a head-lease is terminated before its normal expiration date any sub-lease will remain in existence and the landlord will become the landlord of the tenant under the sub-lease. The sub-tenant will pay the higher of the sub-lease rent or a fair proportion of the rent charged under the head-lease.
This section must always be kept in mind when a sub-lease is contemplated for the overarching principle of protecting the landlord’s investment. It is possible that a landlord could find themselves in a position whereby they are left with a tenant of a weaker or less attractive standing who cannot perform the covenants and conditions to the required standard or who make an acquisition of the property less appealing.
To protect their investment a landlord will need to ensure that any lease being put in place contains robust conditions in relation to any proposed sub-letting. While alienation provisions can be drafted in favour of the landlord the 1980 Act prevents the landlord from preventing a sub-letting unless they are acting reasonably. If acquiring a property subject to a lease careful consideration needs to be given to the alienation provisions contained in the lease and to any sub-lease in existence.
If you are planning on entering into a lease or acquiring a property which is let, contact a member of our experienced Real Estate team who can guide you through the process.
The content of this article is provided for information purposes only and does not constitute legal or other advice.