Subletting part or all of a business lease: consent, the lease terms and the 1954 Act

Does subletting need the landlord’s consent?

Usually, if the lease requires it. Section 1 of the Landlord and Tenant Act 1988 applies where a tenant’s covenant against assigning, underletting, charging or parting with possession is qualified, so that consent is needed for the transaction (section 1(1)).

Once the tenant serves a written application for consent to an underletting, the landlord must decide within a reasonable time and serve written notice of its decision. If it refuses, the notice must give reasons (section 1(3)). Consent given on an unreasonable condition does not satisfy that duty (section 1(4)).

What do the lease restrictions on subletting cover?

The RICS Code for leasing business premises makes good-practice recommendations, not mandatory rules, on subletting. It recommends that leases allow corporate tenants to share premises with other companies in the same group without creating a subletting (Part 3, para 6.3), and that they allow a sublease of the whole, with consent not to be unreasonably withheld or delayed, at not less than market rent, and generally on terms consistent with the tenant’s own lease (para 6.4). Landlords may impose stricter provisions where the circumstances justify it (para 6.6). The Code’s scope excludes premises that are intended to be wholly sublet by the tenant (RICS Code, Part 1).

The restrictions that bind you are those in your lease, not the Code. Read the subletting clause, and check whether it requires consent, which parties may take a sublease, and what the consent process is, before you approach the landlord. A covenant against underletting without consent is deemed subject to a proviso that consent is not to be unreasonably withheld (Landlord and Tenant Act 1927, section 19(1)(a)), and the section 1 duties apply to a covenant qualified in that way (section 1(1)).

Does the Landlord and Tenant Act 1954 protect a subtenant?

It can. The 1954 Act defines a “tenancy” to include one created “derivatively out of the freehold, whether by a lease or underlease” (section 69(1)). A sublease is therefore within the Act’s definition of a tenancy. The Act applies where the subtenant occupies the premises for the purposes of its business (section 23(1)), unless the sublease is contracted out.

A sublease can be contracted out by agreement. Under section 38A, the persons who will be landlord and tenant of a tenancy to be granted for a term of years certain may agree that sections 24 to 28 are excluded. That agreement is void unless the landlord has served the tenant a notice in the form, or substantially in the form, set out in Schedule 1 to the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003, and the requirements in Schedule 2 to that Order are met (section 38A(1) and (3)).

The notice must be served on the tenant, here the subtenant, not less than 14 days before it enters into the tenancy or becomes contractually bound, whichever is earlier, and the subtenant then makes a simple declaration in the prescribed form. If less than 14 days’ notice is given, the notice must still be served before the subtenant is bound, and the subtenant must make a statutory declaration instead (SI 2003/3096, Schedule 2, paragraphs 2 to 4).

What should a tenant check before subletting?

Work through these points before you agree a sublease:

• Check the subletting clause in the lease for a consent requirement (LTA 1988 s.1(1)).
• Apply in writing, so that the landlord’s time limit to decide starts (section 1(3)).
• If the subtenant is to be contracted out of the 1954 Act, make the agreement before the sublease is granted and check that the notice is served in the statutory form (section 38A).
• Read the rest of the lease for any other restriction on sharing possession, since the Code’s recommendations do not bind the landlord (RICS Code, Part 3 para 6.6).
• Check whether your own landlord, or a superior landlord, must consent: the 1988 Act duty falls on the person whose consent the covenant requires (section 1(2)).
• The 1954 Act applies to a tenancy of premises that the tenant occupies for the purposes of its business (section 23(1)), so check who will occupy them, and for what, before relying on any protection.