Want to share rent costs by subletting? What you need to know to become a head tenant

• Lockdown has left some tenants wanting homes with larger shared indoor areas and more outdoor space, while also hoping to find someone to share the extra rent.
• New university students and recent graduates entering the workforce leave home and need to share accommodation.
• Changes in working practices brought about by the pandemic, along with the need to control costs, have prompted some businesses to consider subletting surplus office space.

Whatever the reason, and whether you are subletting a private home or an office, here is what you need to know.

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Subletting usually requires the landlord’s consent

Any head tenant considering subletting should first check their lease. Most commonly used tenancy agreements contain a clause prohibiting subletting without the landlord’s written consent. Commercial leases may also specify conditions for that consent, such as requiring a prospective subtenant to demonstrate that they are responsible and able to pay the rent and meet any other lease obligations. Other clauses may set preconditions for subletting: for example, a landlord may withhold consent if the head tenant has breached certain terms of the lease.

Subtenants also need to consider the head tenant’s plans carefully, because their immediate landlord is the head tenant rather than the property owner. If the head tenant ends their lease early and moves out, a subtenant may have to adjust to a new landlord. For commercial subtenants, this could mean going from sharing space with a head tenant whose business is compatible with theirs to having a landlord in an entirely different line of business, or even a competitor—an awkward situation.

Landlords cannot refuse subletting without good reason

Although leases usually require the landlord’s consent to subletting, this is only the legal restriction on tenants. The law also restricts landlords: they cannot refuse a request to sublet without good reason. In particular, once the new Residential Tenancies Amendment Act 2020 takes effect, tenants under all tenancy agreements, including fixed-term agreements, can request an assignment. Landlords must consider those requests and cannot refuse without a reason.

Compared with residential landlords, commercial property landlords may have more grounds for refusing a sublease. For example, the subtenant may be unable to demonstrate sufficient financial resources to take on the sublease, may intend to use the property for a purpose not permitted under the head lease, or may compete with another tenant’s business.

However, Katrina Wood of law firm Saunders Robinson Brown said her usual advice to landlords was that “if they really want to decline it, they should consider it carefully, because the grounds on which a landlord can refuse are a tricky area”. It is therefore best to seek expert advice on whether there are sufficient grounds for refusal.

Claire Tyler, a partner at law firm Rainey Collins, said subletting was extremely common when a head tenant did not use all the leased premises. Once the landlord agrees to a sublease, it is best to ensure that consent is recorded in writing and an appropriate deed of sublease is signed. 

For commercial tenancies, if a subtenant intends to use the premises for a business purpose different from that recorded in the head lease, the landlord must be informed beforehand and their consent obtained. This should be recorded in the deed of sublease as an amendment and supplement to the head lease terms.

The head tenant remains responsible for the entire lease

Under a deed of sublease, the subtenant pays rent directly to the head tenant to occupy part of the premises. However, the head tenant remains responsible for all obligations under the head lease and for the whole premises. This exposes the head tenant to some rental risk. What should they do to minimise it?

• Carry out appropriate due diligence on prospective subtenants. Subletting space to someone who may cause problems or breach the head lease effectively increases the head tenant’s own liability.
• Just as a head tenant must pay a bond to the landlord when leasing a property, they can consider requiring security from the subtenant, such as a personal guarantee, bond or bank guarantee.
• If a subtenant fails to pay rent on time, the head tenant should seek legal advice promptly. 

Subtenants also need to protect their own interests. Claire Tyler advised that, because subtenants must comply with the terms of the head lease, they should obtain a copy at the outset. She even recommended that subtenants should not sign a deed of sublease without first reviewing the head lease, lest they later discover obligations they cannot fulfil.

Sharing responsibilities and costs

When requesting permission to sublet, head tenants should already understand how the various responsibilities associated with the lease will be shared, including access arrangements, insurance and utility costs such as water and electricity. Insurance and some other shared costs can usually be apportioned according to the floor area occupied. Utility costs, by contrast, can be more complicated to calculate and require agreement with the subtenant.

Most importantly, once the parties have agreed how to share responsibilities and costs, those arrangements must be recorded in writing in the deed of sublease to avoid possible disputes later.