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March 2016

An introduction to subleases

Subleases are commonly used in relation to rental property, and there are a number of associated considerations which this piece will touch upon.

An introduction to subleases

A sublease is when a tenant disposes their possessory interest of the rental property which is less than a whole. Subleases should be distinguished from assignments, which are actions that involve a tenant disposing the whole interest in the rental property – irrespective of the conveyance which was described as a sublease.

In instances where a sublease is created, it does not affect the rights associated between the tenant and the landlord. However, the creation of a sublease does produce a situation where a simultaneous relationship between the landlord and the tenant, as well as the landlord and the subtenant, has been established. Although, there is no privity of estate or contract that exists between a landlord and the subtenant, upon the valid determination of the lease between the landlord and the tenant, the sublease will also be determined as well.

Can landlords prevent subleases from being created?

A common law right does exist which allows for a tenant to sublet their interest, however, it is common practice for a covenant in a lease which does not allow for, or restricts a tenants ability to create a sublease.

Therefore, if a common law right does exist for a tenant to create a sublease, can a landlord prevent a tenant from subletting their interest? Unless there is an absolute prohibition preventing a tenant from assigning a sublease, there is no impediment for a tenant to sublet a possessory interest in regards to the rental property.

On the other hand, if there is an agreement between the landlord and the tenant which contracts out their common law right to sublet the property, then any action in which the tenant sublets their interest in the property will be considered as a breach of the covenant.

When can a tenant create a sublease?

Contrary to a covenant against subletting the property by a tenant, he or she is able to do so and the landlord cannot unreasonably withhold consent. The common law will deem consent to a sublease as unreasonable when:

  • the reason for withholding consent has nothing to do with the relationship between the landlord or tenant in regards to the subject matter of the lease; or
  • the tenant is respectable and responsible; or
  • the reason outlined by the landlord for withholding consent relates to the effect of an action of assignment on potential investors.

In contrast withholding consent will be deemed as reasonable when:

  • the reason for withholding consent is what a reasonable landlord might do under the circumstances; or
  • the person in which the interest is to be assigned may use the lease to harm or injure property that is in close proximity to the property of the landlord; or
  • the landlord has serious doubts in regards to the ability of the assignee to pay rent.

When a matter of law involves the question of reasonableness – such as whether or not a landlord has been unreasonable in withholding consent for a tenant to sublet the property – boils down to the facts of each individual case.

In deciding on reasonableness, the test from International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd is to be applied requiring the court to make an assessment on what a reasonable landlord would do under the circumstances in regards to the matter before the courts.

Statutory protections also exist which outlines that consent to sublet a property may not be unreasonably withheld in the majority of jurisdictions within Australia, and we can look towards s 80(1) of the Property Law Act 1969 (WA) as our legislative example which states the following:

“In every lease containing a covenant, condition or agreement against assigning, underletting or parting with the possession, or  disposing of the land or property leased without licence or consent, that covenant, condition or agreement shall, unless the lease contains an express provision to the contrary, be deemed to be subject to a condition to the effect that the consent shall not be unreasonably withheld and that no fine or sum of money in the nature of a fine shall be payable for or in respect of the licence or consent, but the last mentioned condition does not preclude the right to require the payment of a reasonable sum in respect of any legal or other expense incurred in relation to the licence or consent.”

However, it is important to note that if a lessee assigns a sublease, they are then assuming the responsibility that if the subtenant fails to honour the clause of the head lease, then the onus of the original lease will fall back onto the tenant.

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