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Why Sharing Your Office to Save Money Can Cost You Your Business!
Friday 14th January 2011
Despite a weak economy there seems to be a number of optimists riding out the economic storm by simply cutting overheads. In an attempt to reduce costs, many businesses are choosing to underlet their leased properties, however what seems to be a straightforward cost effective decision can lead to extreme consequences. In a simple underletting, you in effect give occupation of a property to a third party who pays you a rent, whilst you also continue to pay rent to your Landlord.
Solicitor, Laura Hallett at Marsden Rawsthorn Solicitors explains that there is strict compliance with terms of leases when underletting, therefore good preparation is essential. Tenants should ensure that they consider their leases (and any supplementary documentation) carefully and liaise with their solicitors accordingly.
"The right to create an underletting is usually available but the first thing you need to do is check that you are actually able do so under the terms of your lease. Generally, leases will allow you to underlet but the consent of the landlord will almost always be required. Whilst consent cannot be withheld unreasonably, there may be a number of conditions that the Landlord can lawfully attach to its consent.
An important distinction however is between underletting the whole of your property, or just part of your property. Underletting part of your property has clear advantages - whilst reducing your overheads, it can also lead to a useful connection between businesses, for example, an accountant and an IFA working from the same office can generate a number of referrals for each other. However, unless you have a particularly large property, it is very unlikely that you will have the right to underlet part only.
Whether you are underletting part or whole, the chances are that you will have to approach your Landlord for consent before you can actually underlet. If you are permitted to underlet the property under the lease, your Landlord would not be entitled to unreasonably withhold its consent, so he has to act reasonably. However, if you do not actually have the right to underlet, then there is no obligation on your Landlord to be reasonable or to even respond to your request.
Another common provision in Leases is that the rent to be reserved in the underlease must not be less than the rent payable under your lease and failure to ensure this would result in a breach of the Lease. This can create difficulties in the current market since the rent payable under your lease may actually be greater than the market rent - therefore, you may struggle to underlet since no-one will be willing to pay a high rent.
In circumstances where you either don’t have the right to underlet, or you will struggle to underlet owing to the rental market, there is unfortunately nothing you can do other than approach your Landlord to see whether he will take a commercial view. However, note that if you are underletting at a rent which is less than what you pay, you will then have to pay the shortfall to your Landlord out of your own pocket.
In either case, if your Lease with a landlord is ever breached by your actions, the Landlord may be entitled to commence forfeiture proceedings, which could mean you could lose your lease, your office and unfortunately for many companies where location is paramount, this could mean losing your business.
Another area where people fall victim to legal action is by not recording any new agreement with the person you wish to sublet to. It is essential that when you wish to rent out a part of your property, you have a written agreement by deed, witnessed and dated. The terms of your Lease may actually require that the Landlord approves the underlease before it is completed. Furthermore, you are still fully accountable for your lease so if for some reason the new tenants you are underletting to fail to make a payment, it is you who is responsible. On many occasion, what may start out as a good business relationship may turn into an ongoing set of problems. If there is a written contract which covers every eventuality it is a lot easier to provide evidence in order to resolve a financial situation.
Further advice comes from that of responsibility; you have to remember that you are accountable not only for the rent as mentioned, but also for the property itself. You must stipulate within the contract that those that underlet are responsible for their own area, this is inclusive of damage, injury, fire etc. Whilst also remembering that you are liable for 'common parts' those areas which are used for access. There is a way to create a cost cushion here by also stating in the contract that there is a service charge for the upkeep of the common areas. For example, if continual access through the winter months damages flooring in an entrance area, the service charge costs every month would probably cover this expenditure. In addition, you could also claim a percentage of insurance costs from the tenant to cover your own insurance.
In summary, the law is there to protect you and so following it is invaluable, choosing to find short cuts can often land you in hot water. What could seem a great way to cut costs could have a big price tag."
See more news from 2011.
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