Property can be one of your biggest overheads. Renting out spare office space for much needed revenue is tempting.

But if you don’t take the proper precautions, it can be more trouble than it’s worth.

Remote working was the norm for 2020, and the future is uncertain for traditional workplaces. The pandemic has led many business owners to consider different flexible working arrangements. Some companies have found themselves stuck in fixed, long leasehold agreements. But renting spare office areas to like-minded businesses could be the answer.

We’ve explained the key considerations before rushing to calculate your additional income.

Check your lease thoroughly

If you are renting your property, you need to read your lease to establish whether there are any clauses restricting you from sharing the property with another business. These clauses are usually labelled as ‘subletting’ or ‘assignment’ clauses.

Your landlord may have included a complete or qualified prohibition in your lease. An absolute or compete ban means you cannot sublet it at all. If the ban is qualified, you need the landlord’s formal consent before you can share or sublet (sharing on a long-term basis).

You’ll be expected to pay the landlord’s legal and surveyors’ costs. Obtaining a formal licence to underlet can cost hundreds of pounds and it usually takes a while to agree.

You’ll also need to check that you are insured to share the office space.

Should you grant a lease or licence?

To rent out spare office space, businesses either use a sublease or a licence agreement.

A lease is between a landlord and tenant. It grants the legal right to exclusive possession of premises for a period of time, in return for rent.

• A lease grants an interest in land. It offers the tenant certain legal rights.
• Leases usually give tenants the right to exclude all others from the premises.
• To make any changes to the lease, the landlord can either surrender it and issue a new lease, or agree a formal variation by way of a ‘deed of variation’.
• The land can only be sold subject to the conditions within the lease.

A licence is between a licensor and licensee. It grants contractual rights to occupy premises in return for a licence fee. It doesn’t entitle you to exclusive possession.

• Licences are contractual agreements between two parties, so they’re usually more flexible than leases.
• Licences are typically shorter than leases.
• The amount of space and the details in a licence can be adjusted quite easily.

Generally, landlords tend to favour a licence. It offers a licensee less protection than under a lease.

How long can you rent the space for?

Under the Landlord and Tenant Act 1954, tenants can acquire statutory rights of occupation. If it applies, the tenant can be automatically entitled to a new tenancy on similar terms upon the expiry of the initial lease.

A landlord will only be permitted to terminate the tenancy in limited circumstances. Trying to do so can be expensive, as the tenants can claim compensation and landlords will incur legal fees.

A tenancy for a term of six months or less does not ordinarily attract security of tenure under the 1954 Act.

If provisions are agreed to extend that term, or the existing terms are renewed on the same basis (i.e. the tenant would have been in occupation for a year), there are potential risks.

It’s possible to exclude the 1954 Act security of tenure provisions, if both parties agree. A strict procedure must be followed, including a formal notice by the landlord. The tenant must declare their understanding of giving up valuable rights which would otherwise be granted by the 1954 Act.

Can you just do it all informally?

It’s tempting to let someone informally occupy the space with terms agreed verbally. You would avoid the costs of going through a landlord and it’s faster. But without a formal document, you’re exposed to multiple risks.

Disputes with your landlord, the occupier and potential eviction are all on the cards. The financial costs, stress and reputation damage could ruin a growing business.

 

Key takeaway: It’s hard to predict what office space you’ll need further down the line. Renting areas on a short-term basis can give you much needed income. Licenses and leases have different advantages, so it’s best to get legal advice to make sure your business interests are protected.

Get in touch with our team now to discuss your best way of renting out spare office space.