I’ve recently been involved in a few subletting transactions relating to offices in London. These transactions were time-critical, but very time-consuming, and the pain of securing superior landlord consent for the subletting at times made me want to poke myself in the eye with a stick. No-one was at fault: all principals, agents and lawyers involved were prompt and sensible, but the process still took forever. And it made me think – is this really the best we can do? Are traditional landlords just helping to dig their own graves with this process.

Every landlord in town knows that, in what has been a very short space of time, WeWork, The Office Group et al have changed the office landscape. Serviced offices have gone from a rather bland and grubby reputation as overflow space to a positive lifestyle/workstyle choice. Some of the traditional landlords have been quite quick to react to that and, even if beer taps are not appearing on every office floor in London, there’s a widespread recognition that property is now a service rather than just a commodity, and building owners are improving common space and public realm to make occupying a better experience – there’s a food truck and bicycle repair kit in every freshly-landscaped courtyard.

Of course businesses use flexible offices for several reasons, not just because they’re aesthetically pleasing and attract the talent. They use them because the process of expanding and contracting the space you occupy is much easier in flexible accommodation than it is in space which is let on traditional terms.

So can the traditional landlord do something to address that? Well, finding additional space is always going to be difficult, and that will apply almost as much to a fully coffee-shopped and hipster-staffed co-working building that’s at 90-odd% occupancy as it will to a traditional building. Some landlords address this by holding back say 5-10% of the building’s floor space for short-term use by existing tenants of the building, who may for example have institutional-style ten year leases on a couple of floors, but suddenly find they need some overflow space to deal with a new project. That’s an enlightened approach.

But what about tenants who need to contract rather than expand? Allowing tenants to offload some space in a quick and efficient way, without having to obtain the formal approval of the building owner, could well be something that would influence the owners of a business who are weighing up whether to go for co-working space which may prove cramped, or their own office floor which may prove a financial burden if things don’t go so well (or go so well that they need fewer people to make the same profit).

Subletting provisions in leases have evolved to protect the landlord, and rightly so – buildings are a big investment and need protecting. But maybe landlords could help their tenants, and help themselves (in a changing market), with a bit of flexibility. What if we say to a tenant that they can sublet up to say 40% of their floor space (or 40% of any single floor) on a single sublease without the need to obtain the superior landlord’s consent in a Licence Sublet, provided the subletting fulfils certain realistic criteria and provided the sublease follows a certain format.

What are the superior landlord’s arguments against that, and how can we deal with it sensibly?

• Subdivision can be a nightmare, and must be properly approved and documented. Yes, that’s absolutely right, but why not look at this issue back when you’re granting the Head Lease. We don’t want to make the process of granting the initial Lease any more complicated than it is already, but it would be easy enough at that point to anticipate what might happen, and to identify what would be an “approved sublet area” and what could and could not be done within that area, and with some forward thinking it would be easy enough to come up with a pre-approved way of partitioning that would be acceptable to everyone. Existing reception areas and kitchens would need to be shared by tenant and subtenant.

• The subtenant will come in and start making unauthorised alterations. The Head Lease will say whatever it says, and the subtenant can only work within those boundaries. If they want to make alterations and need consent to do so, then they will have to go through the proper channels and processes. But the Lease can allow some subtenant signage within very clear parameters, and permit some sensible moving of floorboxes and access to fibre etc., without the need to go through the superior landlord. Make your building plug-and-play like the brochure said.

• We need to control who is in the building, we can’t possibly have a building full of subtenants, it would be a management headache. Well, as things currently stand, your tenants can sublet, but your buildings are not carved up into hundreds of sub-occupations (what are the statistics on the percentage of floor space in London which is leased by occupiers and sublet to occupiers?). In terms of management, you continue to deal with the immediate tenant as you always have done. Yes, reception, security etc. will need to have contact with the occupiers, but that’s not difficult.

• It’s very important that we approve the level of rent on every occupation. Is that really the case? We’ve all seen scenarios where the superior landlord approves the deal as long as the rent and incentives are tweaked to make the headline rent look a bit better – sorry, I mean to reflect more correctly the current rental market. A new class of sublets without superior landlord consent could always be classed as “Non-Market Sublets” or something like that, and labelled as such in the documentation, with express agreement between the parties, and a developing understanding in the market, that they do not necessarily reflect the market and so cannot properly be used as comparable evidence.

• I need to know who is in my building and what covenant strength they have. Then spell out what you want – e.g. any subtenant under the Non-Market Sublets provisions must be an active English company or limited liability partnership or traditional partnership that has been in existence for at least 3 years, and before any sublet can be put in place the tenant must provide the building owner with a certificate from a firm of UK chartered accountants stating that the net profits of the subtenant are not less than 3 times the annual rent under the Head Lease (multiplied by the ratio of the sublet space to the overall space let under the Head Lease) and have been so for each of the last 3 years.

• I must have a direct covenant from the subtenant. You can provide that such a covenant is included in the sublease, and made enforceable by the building owner and its successors in title.

• I can’t allow this sort of thing to go on if the tenant’s in arrears or in serious breach of the Head Lease. Well, that is a very fair point, but why haven’t you done anything about it thus far, and maybe a bit of sublease rent will help the tenant to make the rent payments? Yes, that’s an unforgivably glib comment, but there must be a way to deal with this particular point. Sub-lettings being held up for the sake of a few hundred pounds of arrears on leases where the Head Lease rent is six figures a Quarter are a reality, and it’s absurd, and we all know it. This could, for example, be subject to arrears being no more than a fixed sum – no more than say two Quarters’ rent and service charge – with a mechanism for the figures to be checked with the landlord.              

So this does need a bit of thought, but it’s surely a possibility, and it could be a part of the evolution of the office lease – something that doesn’t compromise the landlord’s position or affect the value of its portfolio, but at the same time, within the occupier market, increases the attractiveness of taking a floor on a ten year lease.

The arrival of the new flexible working space is a good thing. It has shaken up the industry, but there’s no need for the traditional lease, and the value it holds, to disappear.