Subletting at market rent

Many leases state that the rent in any sublease must be the greater of the open-market rent, or the passing rent under the existing lease. This will often make it virtually impossible for a tenant to sublet (since, in today’s market, market rents are likely to be considerably below the passing rent).

Landlords are reluctant to allow subleases at open-market rents for a number of reasons, including:

• The effect on the investment value of the landlord’s building.
• The subtenant could become the direct tenant of the landlord in a number of situations (for example, a surrender of the headlease).
• The Law of Distress Amendment Act 1908 allows a landlord to serve a notice on the subtenant to pay the sublease rent direct to him where the rent under the headlease is in arrears. However, that remedy is less effective where the sublease rent is less than the headlease rent.
• Lower sublease rents can provide damaging comparables for rent reviews (although landlords can protect their position by reserving the full head lease rent in the sublease but with a staggered rent free period, or reserving a lower rent but asking the tenant and subtenant to acknowledge a close trading relationship).
• If the sublease has security of tenure, a landlord could find itself as the competent landlord of the subtenant on a renewal of the sublease.