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.
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.
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.
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:
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.
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.
When considering subletting part (or all) of your premises, follow this process:
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.
Note, under your lease, you will likely have to obtain landlord consent to grant a licence to a proposed occupier as well.
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:
Subleasing is a common and often vital part of any doctor’s business. It is important to get it right first time around and to make sure the documents are fit for purpose. It is often the case that parties make mistakes in an area as complicated as subleasing. Here at Avant Law, we have years of experience drafting, advising on and terminating subleases and can make sure you have the proper protections around you.
Lindsay McGregor is a lawyer and the Head of Property in our Avant Law team. He has been working in property related matters for almost 20 years. He was previously a partner at a highly regarded national firm and has considerable experience in leasing across Australia. He has acted for some of the Country’s biggest landlords and knows how they think. This experience will help ensure you get the best outcome you can.
Disclaimer: The information in this article is general in nature and is current to 15 July. It does not take into account individual circumstances and is not professional legal, financial or taxation advice. Avant Law provides legal services. It does not provide taxation or financial advisory services.
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