By Claire Miller, Partner – Head of Property, Penman Sedgwick LLP
Most commercial leases will allow the tenant to assign or underlet (with the landlord’s prior consent, and usually subject to various specified conditions).
However, underletting of part is often prohibited, and any other parting with possession or sharing of occupation is very likely to be prohibited or strictly controlled – the landlord’s main concern being to ensure that they have proper control over any disposals, who has rights to occupy the premises (and on what terms), and (importantly) that statutory rights of security of tenure are not acquired by an occupier unless the landlord has expressly agreed this.
If a lease contains a prohibition of sharing of occupation, the landlord is not under any obligation to consent to the tenant sharing occupation with another person/entity, and the landlord will have absolute discretion when considering a request from a tenant for such consent and (if consent is given) the terms on which consent is granted – which might include financial payment(s) to the landlord if the sharing of occupation will be generating income for the tenant (e.g. when occupation is shared with a third party under a concession or franchise agreement).
If the lease contains a clause permitting sharing of occupation, the terms on which this will be permitted should be set out clearly in the lease. Common terms and conditions are:
- Sharing of occupation with another company in the same group as the tenant. Note that the definition of ‘group company’ should be clearly defined in the lease, and this should be considered carefully by the tenant to check that the company with whom occupation is to be shared falls within the definition.
- Sharing of occupation with concessionaries or franchisees. This is most common with tenants of large retail premises such as department stores. The landlord will often seek to control how many other occupiers the tenant may share occupation with, and/or how much of the floor area may be occupied in this way.
- No relationship of landlord and tenant should be established by the sharing of occupation, so that there is no risk of statutory rights of security of tenure arising and there is no unintended ‘disposal’ of the lease (or part of it).
A word of caution for tenants: you should always consider your lease terms carefully before embarking on any arrangement to share occupation with a third party, to ensure that the terms are not breached (with all the consequences that may flow from breach).
If you need legal advice, we can help. Please email cmiller@pennmansedgwick.com or call 01923 225212