In this article, we share some practical tips to help commercial landlords and tenants and useful information relating to subleases.

Some points will act as a refresher while others will hopefully provide something new to ponder.

1.  The maximum sublease term is determined by the head lease

If a sublease is granted for a term longer than the term of the head lease, the sublease term is automatically shortened to expire at the same time as the head lease (without affecting any remedy the subtenant may have against the sublandlord for having contracted to give them a longer term). See Sections 215(3) and (4) of the Property Law Act 2007.

2.  A ‘reputable’ subtenant is recommended over a ‘respectable’ one

The Auckland District Law Society’s Deed of Lease (“ADLS Lease”) is commonly used for commercial premises in this country. Under clause 33.1(a) of the current edition, the prior written consent of the landlord is required to any proposed subletting.  The landlord may not unreasonably withhold consent where, amongst other conditions, the tenant can prove that the proposed subtenant is “respectable”.  This is a subjective test and tenants negotiating new lease terms should consider substituting reference to “reputable” as a benchmark that is easier to measure and satisfy.

3.  Sublease rental could impact head lease market rent review

In terms of a landlord “unreasonably” withholding consent, the Court in Ashworth Frazer Ltd v Gloucester City Council [2001] 1, WLR 2180 held that consent may be withheld on one reasonable ground, notwithstanding that the landlord may have also considered unreasonable factors. In a subletting context, this may extend to concern from a head landlord over a lower sublease rent impacting the head lease market rent review.  To mitigate against this potential issue on both sides, consider adding a lease clause providing that any sublease rental is disregarded for a head lease market rent review.

4.  Manage sublease timeframes with care

There are various practical timing considerations to factor in when agreeing sublease terms:

• If the subtenant is not responsible for make-good obligations at the end of the sublease term, the sublandlord will need to ensure that the sublease expires with enough time for the sublandlord to complete relevant works under the terms of the head lease.
  
  
• If the subtenant is given a right of renewal which, if exercised, triggers the sublandlord’s obligation to renew the head lease, a reasonable time needs to be left between receipt of the subtenant’s renewal notice and the sublandlord’s cut-off date for giving notice under the head lease (say, one month).
  
  
• If the subtenant is given the right to engage in a market rent review process, timing buffers need to be built in so that the sublandlord can pass any proposed rent objections up the chain.
  
  
• Where sublease payments are to be passed through to the head landlord, ensure that payment due dates are at least 2 days before the required on-payment due date.
  
  

5.  Peg subtenant ‘no access’ relief to relief obtained under the head lease

ADLS Lease clause 27.5 (No access in Emergency) was introduced in response to the Christchurch earthquake experience and was in the spotlight because of the various restrictions imposed as part of the Government’s COVID pandemic response. To avoid potentially having to address twice the thorny question of what is a “fair proportion” of rent and outgoings that correctly cease to be payable when this clause applies, a sublandlord should consider pegging a subtenant’s relief under clause 27.5 to the relief (if any) obtained by the sublandlord under the head lease.

6. Other issues a sublandlord should carefully consider

• Any landlord obligations under the head lease that are to be enforced by the sublandlord but not owed to the subtenant (for example, any provisions under the head lease relating to the seismic performance of the building of which the leased premises form part); and

• Any right of first refusal to purchase the subject property or early lease termination rights given under the head lease that are not to pass through to the subtenant under the terms of the sublease. (From a subtenant’s perspective, they would want to ensure that the sublease prohibits the sublandlord from exercising any right of early termination during the sublease term, at least without the subtenant’s prior written consent).

   

Our recommendations

For assistance drafting your lease documents to reflect the points above and for further practical tips and information please contact Mike Kitto.