Guide to our Sub-Lease Agreement Template

Posted by Stephen on 20th April 2015

Our sub-lease agreement template should be used by a landlord (which is itself renting commercial premises under a lease, i.e. the headlease) when sub-letting all of that property to a tenant.  This agreement includes optional wording, so it works whether or not:

  1. someone guaranteed the tenant’s obligations; or
  2. there is a right of renewal of the sub-lease when it expires (i.e. “security of tenure”).

It does not provide for the tenant to terminate it early by means of a “break clause”.

Accompanying our template you will receive a free copy of the declarations and notices you need to have the new sub-tenant contract out of the rights given by the Landlord and Tenant Act 1954 to renew the sub-lease when it expires (the “security of tenure” provisions) – see the note on the procedures at the end of this guide and also the note on clause 13 below.

Clauses in our Sub-Lease Agreement

Date – Fill in only the year for now.  The rest can be filled in by hand when the sub-lease agreement has been signed.

Party clauses – For party 1 (the landlord) and party 2 (the tenant) complete their names and addresses. If there is to be someone guaranteeing the obligations of the tenant, in the details for party 3 insert their name and address. If not, party 3 should be omitted. If any party is a company, then insert the country where it is incorporated and its registered number.

Background

(B) If consent is required under the headlease that the landlord holds, then specify whose consent is required.

Numbered clauses

1. Interpretation – Here we explain the key terms in the agreement.

  • Commencement date – Fill in the date the sub-lease will start.
  • Headlease – Fill in the date of the headlease.
  • Insurance Rent – Fill in the number of years of rent that you want the insurance to cover.
  • Interest – Check the rate and complete the name of the bank you want it linked to.
  • Permitted Use – Insert the relevant details of the permitted use of the premises.
  • Property – Identify the premises and include the postal address. Include a scale plan if you can. If you are only sub-letting part of the building, identify what part.
  • Rent – Insert the level of the rent.  If the rent is not to increase in the future during the term of the sub-lease, delete the other words in square brackets.
  • Rent Payment Dates – You have 2 options to choose from here.
  • Review Date – If the rent is not to increase in the future, delete this definition. If it is to increase, choose how often, e.g. every 5 years.
  • Term – Choose between the 2 options and complete.  If granting the sub-lease for the whole of the remaining term of the headlease, it is advisable to make it for at least a day shorter than the headlease, to avoid its taking effect as an assignment of the headlease.

2. Sub-letting – Clause 2 contains the basic provisions about the sub-letting.

3. Consent – Clause 3 refers to the requirement for the landlord to obtain any consent needed for sub-letting.  In clause 3.4 specify whose consent is required.

4. Rent – If there is to be no guarantor of the tenant’s obligations, delete clause 4.2. In clause 4.3 check the number of instalments over which the rent is to be paid each year. If the rent is not to increase during the sub-lease’s term, delete clauses 4.5 and 4.6.

5. Insurance – In clause 5.1 if the landlord is setting the value of the buildings insurance required, then keep the wording in the square brackets (just delete the square brackets).

6. Rates and taxes – Clause 6 states that the tenant shall pay for these sums if due.

7. Utilities – This clause provides that the tenant shall reimburse the landlord for proper utilities costs relating to the property.

8. Interest – This clause provides that the tenant shall pay interest to the landlord if it is late in paying any sum due.

9. Registration of this sub-lease – If the sub-lease will last over 7 years, it will require registration with the Land Registry. The tenant’s duty is to get it registered. If it is shorter in term, delete all of clause 9. Before the sub-lease is registered, the tenant should pay the stamp duty land tax due on the grant of the sub-lease, if any. The amount will depend on the term and the level of rent. This can be calculated on HM Revenue & Customs’ website.

10. Assignments and sub-lets – This clause prevents the tenant from assigning its rights under the sub-lease to a third party without the consent of the landlord. If the landlord wants a degree of control over to question of to whom the tenant can assign, the words in square brackets should be retained and just the square brackets themselves should be deleted. The landlord can assign the sub-lease, e.g. if it assigns the headlease.

11. Repairs – This clause provides that the tenant shall keep the property clean and tidy and in good repair and condition. If the tenant is not under a duty to keep the whole of the property in good repair (e.g. it is only to look after the internal decorative state and is not be responsible for structural issues, e.g. walls and roof), this clause should be modified.

12. Decoration – While clause 11 provides that the tenant must keep the property in good repair and a good condition, this clause specifies as a minimum how often the tenant must redecorate. If the carpets, etc are not to be replaced by the tenant so long as they are still in a good condition at the end of the term of the sub-lease, then clause 12.4 should be deleted.

13. Exclusion of security of tenure – Under sections 24 to 28 of the Landlord and Tenant Act 1954, a tenant occupying the premises for its business has the right to renew the sub-lease when it expires. A requirement of the Act is that the sub-lease is for at least a year and is for a fixed term (although a break clause is permitted).  To cancel the right to renew, the right process needs to be followed.  If you do not follow it correctly, the tenant would be entitled to renew the sub-lease when it expires. For more information, please see the schedule to this guide below, and download the free forms and notices that you need to use for this (they also come with the template and guide when you buy the template). If you want to offer the right to renew, this clause can be deleted.

14. Condition of the Property – The onus is on the tenant to carry out whatever searches and surveys and ask whatever questions of the landlord it thinks are needed.  Ideally this should all be done before the sub-lease is signed. Afterwards, clause 14 provides that the tenant will not raise additional or late queries.

15. Vacant possession – This clause provides that the leased property will not have any other occupiers, e.g. the previous tenant still being there. This includes the landlord’s not being an occupier.

16. Matters affecting the Property – If a search of the Land Registry is being done by the tenant (or ought to be done as it will reveal encumbrances, such as third party rights of way over the premises) a note should be made in clause 16.1.1 of the time and date the search was done.

17. VAT – This clause provides that any sums payable by the tenant are exclusive of VAT and requires the tenant to pay any VAT that might be payable, if any.

18. Landlord’s costs – if the tenant is paying the landlord’s legal costs of issuing this sub-lease, then keep this optional clause and insert the amount to be paid.  If not, delete all of this clause.