By Liad Hadar, Director at Hadar Incorporated, Specialist Property Law Firm
This article first appeared in Asset Magazine’s June 2023 edition

It is no secret that landlords and tenants need to be more dynamic than ever in the current property market.

The commercial property space is potentially the most vulnerable at this moment in time and this article is aimed at assisting with a possible solution to the issues facing this sector.

Given the existing oversupply of space, commercial property requires a bit more care and consideration than simply thinking that one can place or replace tenants in this sector of the industry.

In recent years there has been very little desire for commercial tenants to occupy additional space. In fact, many commercial tenants have sought to downscale their leased premises, leaving them in a difficult situation given that they are bound by lease terms for the full space and rental due by them.

More recently, mainly due to the ongoing loadshedding issues and perhaps also a sense of returning to a physical workplace where one can connect with his/her team, there may be more demand for commercial office space than there has been in the past few years. This creates the opportunities for all parties.

This led me to believe that there is a relatively easy and positive solution to the commercial property problem– subletting or assigning. A solution which can help tenants who have too much space and cannot afford it, a solution for new commercial tenants wishing to take up space without certain complexities referred to below and a solution for landlords who simply want to ensure that their expected monthly rentals are met.

Whilst subletting and lease assignments are not uncommon practices in the commercial property sector, these arrangements carry potential risks and implications for both landlords and tenants. As such, it’s important to understand the legalities surrounding subletting and lease assignment in the commercial context of South African law.

This article will serve to define the differences between subletting and assigning and how to best protect your position as a landlord, whilst assisting the tenant and incoming subtenant or replacement tenant by agreeing to either option.

Why Do It?

The current commercial property market has created a situation where certain commercial tenants have signed leases for too much space whilst certain potential new commercial tenants wish to rent space but without entering the realm of complexities of long-term leases, tenant installation requirements (including the capital costs of setting up the premises) and the need to commit to a relatively substantial premises size.

Even if a new commercial tenant wishes to enter the market and take over an entire lease and not just a portion as a subtenant, the advantages for this (replacement) tenant is that they receive a fully kitted-out leased premises, with certain key infrastructure already installed (internet access as one example!) and no lag time involved in setting themselves up to operate.

When a tenant faces financial issues due to them having too much space and the landlord is at risk of a defaulting tenant, I believe that concluding such deals is the most conducive solution for all parties involved.

Subletting vs. Lease Assignment: Understanding the Difference

In a sublease scenario, the original tenant (sub-lessor) rents all or part of the leased premises to a third party (sub-lessee) for a portion of their lease term but remains liable to the landlord for lease obligations. The sub-lessee’s contractual obligations are with the original tenant, not the landlord.

In a lease assignment, the tenant transfers all of their leasehold interest to a third party. The assignee steps into the tenant’s shoes, assuming all rights and responsibilities under the lease. The original tenant is typically released from future liability, unless specified otherwise in an agreement. This option requires a tripartite agreement between landlord, tenant and replacement tenant.

Legal Considerations for Subletting and Lease Assignment

It is not common practice for tenants to have an automatic right to sublet or assign their lease in terms of the standard (good) lease agreements used in the industry. These actions usually require the landlord’s consent, as stipulated in the lease agreement.

Landlords can refuse consent based on reasonable grounds, such as the proposed sub-lessee’s or assignee’s likely inability to fulfil lease obligations. However, refusal without reasonable cause could be considered a breach of the landlord’s duty to mitigate their losses.

It’s worth noting that even with the landlord’s consent, the original tenant remains primarily liable in a sublease situation. This means that although the tenant has obtained a possible solution to their financial predicament of paying more rent than what they can afford, they still need to pay the landlord in full monthly and collect their own rental contribution from the subtenant.

In the case of a lease assignment, liability will depend on the specifics of the lease agreement and assignment documentation. In other words, if the original tenant is completely absolved by agreement with the landlord and the new tenant steps into their shoes, then the original tenant is completely discharged of their liabilities.

Protecting Landlord’s Interests

As a commercial landlord, there are several ways to protect your interests when faced with subletting or lease assignment requests:

Lease Agreement Clauses: Your lease agreement should clearly articulate the conditions under which subletting or lease assignment may occur. This may include clauses allowing you to vet and approve potential sub-lessees or assignees.

Liability: Even when agreeing to a lease assignment, consider maintaining the original tenant’s liability (or a portion thereof) as security for your potential losses. If the assignee defaults, the original tenant can be held responsible. You can also demand additional security, including personal deeds of suretyship, bank guarantees and the like.

Review Financial Stability: Before consenting to a sublease or lease assignment, thoroughly evaluate the potential sub-lessee’s or assignee’s financial capability to meet lease obligations.

Consent Letter / Sublease Agreement / Agreement to Assign: If you agree to a sublease or assignment, confirm the terms and conditions in a formal consent letter / sublease agreement / agreement to assign to avoid future misunderstandings or uncertainties which can lead to unnecessary, risky, litigation.

Conclusion

While subletting and lease assignment can offer benefits to commercial tenants and ensure that landlords are best placed to receive their expected rentals in full every month, these arrangements necessitate careful legal consideration from a landlord’s perspective.

As these arrangements can be complex, it’s advisable to consult with a Property Law specialist to ensure that such agreements adequately protect your interests and place you in a better, not worst, position overall.