Many firms have experienced transformation as a result of recent events. Some people have benefited from the transition and seen growth, which has prompted them to expand by purchasing larger facilities. Others need to reevaluate their footprint in an effort to downsize due to financial difficulties or changes in their working styles. The possibility of “sub-letting” all or a portion of their facilities to another firm is one possible choice for businesses wishing to reduce expenses.

This article examines the conditions under which landlords may withhold consent from commercial tenants in Scotland before they enter into a sublease.

What is subletting?

When a tenant of a business lease grants a sublease to a different party (the “sub-tenant”) who will occupy in their place, this is known as subletting. Subletting enables the original tenant (the “head tenant”) to “pass on” the financial burden of paying rent (and other amounts) to the sub-tenant by renting all or part of the property to someone else. In rare cases, the original tenant may even be able to benefit by subleasing the space at a greater rent than stipulated in the initial contract.

Landlord’s consent

In almost all business leases in Scotland, it is stated that if a tenant wants to sublet, they must first get the landlord’s permission in writing.

The terms of the lease and the particular facts and circumstances surrounding the proposed sublease will determine whether a landlord can refuse to give an agreement to a sublease.

Unless otherwise specified in the lease, the landlord will have the ultimate right to reject consent and will not be required to provide a justification for doing so. But the majority of commercial leases provide that the landlord’s approval cannot be unreasonably withheld. That raises the question of whether a landlord might legitimately refuse to approve a proposed sub-let.

That raises the question of whether a landlord might legitimately refuse to approve a proposed sub-let.

The Outer House of the Court of Session outlined some of the fundamental considerations that apply when determining whether a landlord has the right to deny a request to sublet in the landmark case of Burgerking Ltd. v. Rachel Charitable Trust:

• The landlord is not permitted to refuse permission for reasons unrelated to their relationship with the tenant, nor is the landlord permitted to refuse permission in order to obtain a corollary benefit.
• The renter must be given the landlord’s reasoning so they can decide if consent was properly denied. Even if those other justifications would have been valid at the time, the landlord cannot later rely on them.
• It will typically be sufficient to demonstrate that at least one of the landlord’s objections is legitimate if the landlord gives more than one justification for rejecting the request. However, if the court determines that the landlord’s decision was unreasonable as a whole because one of the grounds was found to be incorrect or if the many justifications offered by the landlord were not completely independent of one another.

The landlord could refuse consent for a variety of reasons. In Burgerking, the court determined that a landlord’s refusal to provide permission was fair given the possibility that a reverse premium to be paid to the subtenant would have driven down the property’s market rent in the event that it were to be re-let in the future. The subtenant’s business kind and the proposed subtenant’s financial situation are two further justifications that a landlord can try to use (e.g. if this would interfere with the trade mix at a shopping centre or retail park).

Comparison with assignation

Subletting is distinct from assignation, which is the transfer of a lease from one tenant to another. In an assignment, the exiting tenant’s rights and obligations under the lease are transferred to the new tenant, negating the landlord’s power to take legal action against the original tenant as in a subleasing arrangement. Because the head tenant is still responsible to the landlord for the rent and other amounts due under the head lease, it is often less likely to be acceptable for a landlord to withhold consent to a sublet based on the sub-financial tenant’s strength.

Risks and benefits to landlords

When a landlord approves a sublease, there are risks and rewards.

The key advantage is that the landlord can guarantee that the property is occupied by letting the renter transfer the responsibility for paying rent to a third party. The alternative may be that the landlord is compelled to revoke the lease for failure to pay rent if the head tenant is suffering financially to meet their current obligations under the lease. From the standpoint of the landlord, a sublease arrangement enables them to maximise their income from the property by decreasing the possibility that any space will be left empty.

Subletting does, however, come with hazards. Because it is not a party to the sublease and cannot enforce its conditions, the landlord has less control over the leased property. The subtenant might have been unknown to the landlord in the past and might not have been as reliable of an occupier as the head tenant. Additionally, the future rental value of the property may be impacted if the rent under the sublease is lower than the rent under the head lease.

Key takeaways

In Scotland, landlords should be aware that in order for a sublease to be effective, the tenant typically needs the landlord’s permission first. Landlords should carefully assess requests for consent, taking into account the terms of the lease and the specific circumstances of the case, and, if necessary, obtain legal counsel. If the landlord chooses to withhold consent, it should provide a thorough and thoughtful justification to reduce the possibility of a legal challenge.

Please don’t hesitate to contact our team if you need any more details or assistance on subletting.