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How to provide and Option to a Sub Tenant

It is common for a lessee to sub-let part of the premises they occupy to a sub-lessee. A contractual relationship is formed between the head lessee and the new sub-lessee, which is separate to the relationship between the landlord and the head lessee (see diagram).

Sublease diagram

Both of these agreements may provide an option to renew for a further term under the lease, but there is often a question around how to provide a sub-tenant with a measure of security without breaching the terms of the original head lease.

Options to renew

Another point to consider is the framing of the option to renew the term in the sub lease and how it can be exercised.  For many head lessee’s the actual viability of their own lease and any further term is often dependent on the continued occupation by the sub tenant. Most leases contain a provision requiring landlord consent before issuing a sub-lease, however this consent cannot be unreasonably withheld. See this article on retail subleasing and this one for commercial property subleasing.

On the assumption that you have obtained that consent, it is important that the grant an option to renew the sub lease to the sub tenant must not create a breach of the head lease terms.

For example, is the exercise of the option to renew the term under the head lease dependent upon the exercise of the sub lease? Are there any considerations in granting sub-lessees an option to renew the term? 

Duration of option and expiry

The time for the sub tenant to exercise its option to renew must expire at least one day prior to the expiry of the head lease option to renew. The duration of the sub-lease must not exceed the duration of the head lease. This includes termination clause dates. The terms of the sub-lease must also not contravene any obligations under the head lease. This is because a sub-lessee establishes a relationship with a head lessee and not the landlord (see diagram above). This means that the sub-lease cannot exist without the head lease and if the head-lease is terminated, the sub-lease is also terminated. If the sub-lease continues, this would be a case of assignment and not sub-letting.

To avoid confusion, assignment is where the head lease is assigned in full to a new lessee who will generally occupy the whole of the premises themselves. The new lessee takes up the terms and establishes a relationship with the landlord (in effect ‘taking over’ the head lease).

So can you grant options to renew under a sub-lessee?

Yes you can, but you have to be careful.  It is possible to structure an option under a sub-lease, which is conditional upon the exercise of the option by the lessee under the head lease. However, the expiry of the option must be set one day prior to the option expiry under the head lease. 

It is important that you obtain legal advice to assist in the proper drafting of the lease terms to ensure that you do not create improper legal obligations.

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