How does sub-leasing work in commercial real estate


We look at the dos and don’ts for a tenant who is sub-letting a commercial property and the party that is taking the premises on sub-lease

While sub-letting itself is not illegal in India, it may require a lot of care for both the tenant who is sub-leasing, as well as for the company that is taking the premises on sub-lease. We look at all the intricacies involved from the point of view of both the tenant who is sub-letting and the party that is taking the premises on sub-lease.

Tenant who is sub-leasing

A tenant who has taken a building or a floor on rent may be wanting to sub-let part or whole of the rented premises because of various reason. One reason is that the company is moving to another part of the country while the commitment to the landlord for the rented property for a certain duration remains. Another reason can be that there is a slowdown in business and a reduction in workforce is required, making part of the office premises free. Whatever is the reason, the tenant has to check out the following things:

Right of recapture

The tenant has to see what area or what percentage of the total area is  allowed for sub-letting, if at all. Some lease deeds specify the maximum area that can be sub-leased and exceeding that will allow the landlord to exercise ‘Right of recapture’ and the original lease deed will become null and void. Even if the maximum limit is not breached one has to exercise a lot of caution in drafting the sub-lease agreement.

Sub-lease rent amount

The tenant who is sub-leasing will have to look closely at the original lease agreement which may provide that if the sub-lease rent is more than the rent mentioned in the main lease agreement, then the whole or a certain percentage of the difference in rent will be kept by the landlord. One has to be very clear about this.

Sharing of utilities

One must be clear as to how the electricity, water and other utilities bill will be shared with the sub-lease tenant. One must see if there is a different electricity and water meter for the part which is being sub-leased. Otherwise, a blanket amount must be charged from the sub-lease tenant and the same must be mentioned in the sub-lease agreement.

Space sharing potential

One has to see whether the sub-lease tenant can have separate entrance, exit and reception area. How will the car parking area be divided and what about the salaries of the security guard and how that will be split are some of the areas one must be clear about before sub-letting.

Renovation

The sub-lease tenant may require some renovation or some kind of alteration in the space like artificial partitions. One must see if these alterations are allowed by the main landlord and does it suit oneself. The original lease may provide that the tenant can break the lease prematurely, usually 90 days, before the expiration of the full term without having to pay any compensation. One must see if sub-letting will make sense even after such a clause in the original agreement.

Business activity of the tenant

One must be sure the business activity of the tenant who is being sub-leased is allowed by the local and zonal laws and bylaws. Taking professional help from a lawyer or a property consultant, may be necessary if the amount involved is large.

Tenant who is taking the space through a sub-lease

The tenant who is taking the place on rent though sub-lease may want such a set up so as to have a frugal start to the business or because of the advantage of having fewer hassles. Whatever is the reason the sub-tenant has to keep the following in mind:

Default by the original tenant in paying rent

The original tenant who is sub-leasing the space may default in paying the decided rent and this may affect the lease deed of the whole building or the entire space which is leased out. The tenant who is taking space on sub-lease must take in writing that the damages and losses from such an event will be reimbursed by the original tenant.

Predatory or unfavourable terms can be passed on

The tenant who is taking the premises on sub-lease may be a victim of any unfavorable clauses or conditions contained in the original lease deed, which can be passed on in the sub-lease agreement. One must be very careful while agreeing to the clauses in the sub-lease agreement.

Signage and advertising

The tenant who is taking the space on sub-lease must make sure that ample opportunities will be given by the original tenant for putting up signages and advertising boards at the premises.

Maintenance of the sub-leased space

The tenant who is taking space on sub-lease must be clear about who will maintain the rented place. Everything must be taken in writing so as to avoid any denial later by the original tenant.

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