Resolving subletting disputes in commercial property

Subletting is a common feature of modern commercial property occupation and often gives rise to disputes in property.

Whether driven by financial pressures, changing business needs, or the desire to maximise unused space, tenants often seek to grant occupational rights to third parties. However, subletting can be a legal minefield if not handled correctly and can expose both landlords and tenants to significant risk.

Why does subletting happen?

It is increasingly common for occupiers not to take a lease of an entire building or floor where doing so would be too onerous or expensive for the tenant. Instead, they may rent only part of a property that meets their immediate needs. In other cases, a tenant may initially take a lease of a large building but, due to changes in business operations, downsizing or hybrid working practices, no longer requires the whole space. Subletting can therefore appear to be a sensible commercial solution, allowing tenants to reduce overheads while retaining their primary lease.

From a landlord’s perspective, however, subletting can raise concerns about control, covenant strength and compliance with the lease terms.

What are the legal considerations of subletting in commercial leases?

The first and most critical step when considering subletting is to review the lease itself. Subletting is not an automatic right, and tenants must check whether it is permitted under the lease and, if so, on what terms.

Many commercial leases contain an "alienation” clause, which governs whether and how a tenant can part with possession of the premises. This clause may:

• prohibit subletting entirely;
• allow subletting of the whole but not part;
• allow subletting subject to conditions; or
• require the landlord's prior consent.

Where subletting is permitted, the lease often imposes conditions that must be strictly complied with. These may include requirements that:

• the subtenant pays no less than the passing rent (often the open market rent); and
• the sublease excludes an automatic right to renewal and the protection of the Landlord and Tenant Act 1954.

Landlords are typically keen for subleases to be outside the protection of the 1954 Act. This is because if the head tenant vacates and the subtenant has security of tenure, the landlord may find itself “stuck” with a subtenant it did not choose and that occupier may be a risk as far as complying with the lease covenants is concerned.

Consent is another key issue. Where landlord consent is required, tenants must ensure they apply at the correct time and provide all information required by the lease. Proceeding without consent can place the tenant in immediate breach of their lease and open them up to the risk of having their lease forfeited.

Suspected subletting: what should a landlord do?

From a landlord’s perspective, suspected unlawful subletting often comes to light gradually. Initial steps to see if a tenant is subletting may include:

• carrying out site visits;
• checking signage on the premises;
• reviewing social media or company websites; and
• speaking to individuals occupying or operating from the property.

However, it is important to note that the mere presence of another business or individual on the premises does not automatically mean that subletting has occurred. There may instead be a licence to occupy, a sharing arrangement permitted by the lease, or another lawful explanation. The key issue is whether there has been a breach of the alienation provisions in the lease and whether the tenant has parted with possession.

Taking action against unauthorised subletting

If a landlord establishes a breach of the lease, the next step is to consider enforcement options. In many cases, this will involve serving a notice under section 146 of the Law of Property Act 1925.

A section 146 notice:

• formally notifies the tenant of the breach;
• requires the breach to be remedied (if capable of remedy); and
• may require compensation.

If the tenant does not rectify the breach, then the landlord can end this via forfeiture.

What does a landlord need to consider when forfeiting a lease?

Where multiple parties are involved, landlord, tenant and subtenant, matters can become complex very quickly. Once a landlord becomes aware of a breach, it is vital to act promptly. Delays or certain actions can amount to a waiver of the right to forfeit, meaning the landlord would then not be able to bring the lease to an early end.

Landlords should therefore avoid engaging with the tenant in a way that could be interpreted as affirming the continuation of the lease and should take early legal advice to protect their position.

Conclusion

Subletting can be commercially sensible, but it is rarely straightforward from a legal perspective. Both landlords and tenants must carefully consider the terms of the lease, statutory implications and practical risks before proceeding. Early investigation and decisive action are essential.