What Landlords Should Know About Sub-leases in the Office Property Market
By Gert van Schalkwyk
The office property market has been constrained, leading to landlords having to consider alternative leasing models. This has been the case, even before the COVID-19 pandemic and the green initiative to work from home.
The economic downturn, clear over-supply in some geographical areas and rapid implementation of offsite working protocols during the COVID-19 pandemic, indicate possible systemic weak demand for office space in future. The reality for many tenants is that they are locked into lease agreements for office areas that are progressively becoming non-economical. The general footprint being in excess of the diminishing needs.
Under-utilised office space by a sub-tenant
With the office market segment under pressure, renegotiation of leases with landlords are not always possible. Under these difficult trading conditions, tenants are forced to explore cost-saving avenues like sub–leasing of under-utilised office space. The uptake of under-utilised office space by a sub-tenant is generally contractually allowed in Standard Lease Agreements, with a condition that the consent of the landlord would not be unreasonably withheld, in writing.
While legally vetted Standard Lease Agreements, with conditions of lease, is the market standard for leasing agents and landlords, few have Standard Sub–lease Agreements. Landlords receiving requests for sub–letting consent should not only properly vet any prospective sub-tenant, but should also require that a sub-tenant sign a legally vetted Standard Sub-lease Agreement, with conditions of sub lease approved or drawn by the landlord’s legal representative.
The implication of the legal rule in term of the South African Common Law, nemo plus iuris, dictates that a tenant cannot transfer to the sub–tenant more rights than they hold themselves. This principle must form the basis of the drawing of any the sub–lease agreement.
From a technical point of view, a head lease and sub–letting lease agreement should be fully compatible in terms of Terminology, General Terms and Conditions and applicable Schedules.
The landlord must ensure that any agreements contain specific contractual conditions to protect themselves, in case of default of either tenant or sub–tenant. In addition, the landlord should take cognisance of the specific Court of Jurisdiction’s requirements, if the tenant or sub-tenant must be evicted in case of default.
We can expect the emergence of Standardised Sub-lease Agreements drawn by legal practitioners, as the need increases for sub–lease agreements in the office property market.
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