A landlord should always want to protect their investment. Therefore, it is vital for landlords to take extra precautions when their principal tenant is sub-letting to a third party. This article sets out some key considerations on how landlords can protect their interests at the time of entering the head lease with their principal tenant.
Ireland has seen many changes since March 2020. Businesses are now trying to return to “normal” and with this many people have returned to the workplace. However, hybrid work models are now a common practice in many industries meaning some people divide their working week between the workplace and their home. This has led to many commercial premises being partly unoccupied during the working week. Due to this change in work arrangements, sub-letting part of a building held under a lease is becoming increasingly popular.
When a tenant agrees to sub-let part of a premises to a third party, they must do so in compliance with the alienation clause contained in the head lease. The sub-letting is a new lease between the tenant and the sub-tenant where there may be no direct relationship between the landlord and the sub-tenant. In order for a landlord to protect its investment, the quality of the tenant (and sub-tenant) is very important and therefore, the landlord should give extra thought to the rights of the tenant to sub-let as contained in the head lease. A landlord needs to be mindful of Section 66 of the Landlord and Tenant (Amendment) Act 1980 (“1980 Act”) which provides that a sub-letting by a tenant cannot be prohibited but will be subject to the consent of the landlord, such consent not be unreasonably withheld.
Consent to sub-lease
Under the alienation clause in the head lease between the landlord and tenant, the landlord can impose conditions which are to be satisfied before consent is given by the landlord for the tenant to sub-let part of the premises. These conditions may include as follows:-
- The tenant is to apply to the landlord for consent providing all reasonable information on the proposed sub-tenant such as (for a company) constitutional documents, trade references and bank accounts for the previous three years.
- A guarantee is to be signed on behalf of the sub-tenant. To ensure the provisions of the guarantee are agreed, a draft guarantee should be included in the head lease.
- Consent of the landlord may be refused if the granting of the consent would be a breach of an agreement in place between the landlord and another tenant within the same building or development.
- The rent payable under the sub-lease shall not be less than the rent payable under the head lease.
- The sub-tenant is to enter a direct covenant with the landlord to comply with all conditions and covenants of the head lease.
- A condition to ensure a deed of renunciation will be signed by the sub-tenant.
If the landlord refuses consent to the sub-letting, it will be for the tenant to prove the landlord is being unreasonable. The test of reasonableness will depend on the facts of each case.
While the 1980 Act prevents a landlord from prohibiting a sub-lease, the alienation clause in the head lease should be drafted to include conditions to be complied with by the tenant before any sub-letting can be agreed. However, the landlord will always need to act reasonable when considering consent to a sub-lease.
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