Considerations when entering into a sub-lease – Lessor’s recovery rights under leases

Considerations when entering into a sub-lease – Lessor’s recovery rights under leases2018-09-27T06:32:59+00:00

It is common knowledge that lessees have, amongst other things, an obligation to pay rent to a lessor.   However, does this obligation continue when a lessee sub-lets the premises to a sub-lessee and the sub-lease expires or is terminated?

These issues were raised in the High Court decision of Gumland Property Holdings Pty Limited v Duffy Bros Fruit Market (Campbelltown) Pty Limited (Gumland case).

In the Gumland case, the lessee stopped paying rent for the sub-let premises following expiration of the sub-lease.  The lessee was of the view that, following a deed entered into with the lessor to allow for the sub-letting of the premises, that the lessee no longer had any obligation to the lessor for payment of rent for the sub-let area.  The High Court found that the lessee (and the directors of the lessee, who had provided personal guarantees) were obliged to pay:

  • rent arrears; 
  • the lessor’s damages for re-fitting of the sub-let premises and reletting costs; and 
  • damages for the difference in rent and outgoings the lessor would have received from the lease termination date until the lease expiry date.

Accordingly, if a lessee intends on entering into a sub-lease, the lessee should always keep in mind that in most cases, the lessee will remain liable for the sub-let area in the event of default by the sub-lessee and on the termination of the sub-lease. In an attempt to overcome some of these issues, the lease and sub-lease documentation needs to be appropriately drafted to properly give effect to the intention of the parties.

If you have any questions in relation to your leasing arrangements or any other property law related matters, please contact Rebecca Flynn on 9525 8688 or email rebecca@wmdlaw.com.au.

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