COMMERCIAL LAW – COMMERCIAL LEASE – SUBLETTING
When A Hotel, Restaurant, Or Cafe (Hrc) Tenant Holds A Commercial Lease, They May Wish To Sublet Part Of The Premises To Generate Income.
The HRC tenant will make available the premises they occupy under the terms of their lease.
Subletting is therefore different from a lease-management agreement, which involves the transfer of the HRC tenant’s operation and all the assets of the business to the lease-manager.
Subletting is permitted for HRCs, whether they are micro-enterprises, SMEs, or parent companies and subsidiaries.
Most of the time, owners of a café, hotel, or restaurant enter into either:
– a commercial sublease agreement signed with a subtenant for purely commercial purposes, or
– a sublease agreement due to the existence of a mixed-use lease: the lease covers commercial premises with an adjoining residential unit. The manager, who does not intend to occupy part of the premises, will often want to sublet it to maximize the profitability of their business.
Conditions
When drafting a sublease agreement, there are several precautions to take. Subletting a commercial lease is subject to the following main rules.
*Mandatory authorization from the landlord
The landlord must give their tenant permission to sublet. As a precaution, the tenant will negotiate a sublease clause in the lease with their landlord or obtain written authorization from the landlord during the lease term.
Verbal authorization to sublet is very risky for the tenant, even if the sublease has been in place for many years. Indeed, if a landlord takes legal action to terminate the lease on this basis, a dispute may arise regarding the validity of such authorization; the tenant will have difficulty proving that authorization was granted.
This obligation applies to all businesses in the hospitality sector.
FORMALITIES
If authorization is included in the lease or granted during the lease term, the tenant must inform the landlord of their intention to sublet.
It is advisable to do so through a court bailiff to avoid any future difficulties, although it can be done by registered letter with acknowledgment of receipt. The landlord must be involved in the signing of the sublease agreement, whether the sublease is authorized or known to them.
Upon receipt of the request, the landlord has 15 days to indicate whether they intend to exercise their right to participate in the sublease agreement. If the landlord does not respond, subletting is considered authorized.
Authorization may be implicit, but in that case, it must be demonstrated by a clear action on the part of the landlord. Note: the landlord’s mere awareness of the sublet and their failure to react cannot be construed as agreement. However, for example, a letter from the landlord to the subtenant authorizing them to carry out work constitutes tacit agreement to subletting.
If the landlord has not consented to the sublease, and it is in fact taking place, they have the following options:
– to take legal action to terminate the current lease: this way, they will not have to pay eviction compensation to their tenant who has failed to meet their legal obligations by simply allowing an unauthorized sublease, or
– to refuse to renew the lease for the tenant, thus to the detriment of the subtenant, who will also be unable to claim a renewal of their sublease agreement or any eviction compensation.
Formalities for the subtenant
Before or at the same time as signing the sublease agreement, the subtenant must ask the tenant to commit to serving, and providing proof of, notification of the sublease agreement to the landlord after it has been signed.
After the sublease agreement is signed, the hotel, restaurant, and catering (HORECA) subtenant must ask their tenant to provide proof of having completed these formalities.
If there is any doubt about whether the tenant (hotel, restaurant, or catering establishment) has complied with the required formalities, the subtenant (hotel, restaurant, or catering establishment) can take the initiative to request such authorization from the landlord, making the sublease binding on all parties.
The problem most often arises when the landlord takes legal action to evict the tenant (hotel, restaurant, or catering establishment), and therefore the subtenant (hotel, restaurant, or catering establishment), because the sublease was not authorized.
Even if there has been no written authorization from the landlord, the subtenant could argue that the property owner has given tacit consent to the sublease because the sublease agreement was served on them by a bailiff and there has been no reaction from the landlord. However, this solution is risky, and it is advisable for the subtenant (hotel, restaurant, or catering establishment) to obtain written authorization from the landlord.
THE CASE OF SUBLETTING FURNISHED ROOMS
A very common question concerns hotels that sublet furnished rooms for a few days, a week, a month, or a year. Many hotels are involved. In order to “make ends meet,” many “traditional” hotels rent furnished rooms to their guests for these periods. For example, a company might want to sublet a room for six months for an executive or employee working far from home.
In principle, the landlord’s agreement is required to sublet these furnished rooms, either as a general agreement once for the entire duration of the lease, or with each sublease agreement signed by the hotelier. However, this latter option is extremely cumbersome.
Therefore, hotels, restaurants, and cafes (CHRD) have every reason to carefully negotiate their lease and include this subletting option from the outset, as a request made to the landlord during the lease term may result in refusal or approval only with a rent increase.
*The activity must be authorized by the lease
Formalities
The tenant (hotel, restaurant, or café) may wish to sublet to their subtenant (hotel, restaurant, or café) to carry out a new activity. They may also have inherited a situation from the previous operator of the hotel, who sublet even though the lease did not authorize this activity (e.g., serving food when the lease only allows for cold food service).
The landlord’s agreement must always be obtained to sublet to a subtenant operating an activity not authorized by the lease. It is therefore mandatory not to begin this activity without the landlord’s agreement.
The landlord must agree to the inclusion of this new activity in the main lease and in the sublease agreement. Often, authorization from a general meeting of co-owners will also be required to approve the proposed new use of the premises.
For example, it is not possible to sublet:
- premises, or part of them, for the operation of a nightclub (as defined by SACEM regulations), when the lease only authorizes hotel or restaurant activities.
- an accessory residential unit on the first floor for commercial use, as the tenant does on the ground floor (for example, installing a kitchen or a dance floor attached to a hotel).
This does not apply to making the residential unit available to an employee.
- a basement cellar designated as such in the condominium regulations for conversion into a kitchen: in this case, the subtenant must not only obtain the express (or tacit) consent of the building owner, but also convene a general meeting of co-owners to amend the condominium regulations and obtain the necessary administrative authorizations.
The tenant often inherits this illegal situation. Before subletting, it is mandatory for the tenant to regularize the situation with their landlord; otherwise, they risk a lawsuit for lease termination without compensation and therefore the loss of their café, hotel, restaurant, or nightclub.
The lease termination is possible, and therefore so is the termination of the sublease (without any right to eviction compensation for either the tenant or the subtenant).
A subsequent explicit agreement from the landlord can put an end to the dispute, but this solution is not recommended unless the hotel, restaurant, or café (HORECA) inherited this situation. The tenant therefore has every interest in regularizing this situation.
In order to be authorized to operate a “legally new” business, the HORECA tenant who wants to sublet to make their business profitable will often face a request from the landlord to increase the rent.
This is why it is recommended to include a subletting authorization clause in the tenant’s commercial lease.
*The obligations arising from the main lease and administrative health and safety regulations apply to the subtenant.
The tenant must require their subtenant to comply with all the obligations they themselves have as a hotel, restaurant, or café (HORECA). The sublease agreement must therefore include these obligations.
A property condition report must be carried out before or at the same time as the signing of the sublease agreement.
The tenant must also ensure that their subtenant complies with the permitted use of the premises as defined in the main lease agreement, as well as all laws and administrative regulations and any administrative decisions concerning the HORECA sector (e.g., respecting closing times, permitted terrace areas, etc.).
No work or alterations may be carried out without the agreement of both the tenant and the landlord.
The subtenant must pay their share of the expenses related to the sublet premises in proportion to the area they have at their disposal, and they are also responsible for their own expenses (electricity, telephone lines, etc.).
The subtenant must take out business insurance against rental risks and risks related to their professional activity.
It is therefore advisable for the tenant to thoroughly verify the subtenant’s actual business activities and their compliance with all obligations stipulated in the lease, otherwise the landlord may take legal action to terminate the commercial lease without compensation for eviction.
*Rent
The sublease cannot result in the subtenant paying more rent than the original tenant; otherwise, the landlord may request a rent adjustment.
Similarly, the landlord may take action against the subtenant for non-payment of rent, up to the amount of rent paid by the original tenant.
*Term of the sublease and renewal
The term of the sublease cannot exceed the term of the main lease. The landlord must be informed of the subtenant’s request to renew the sublease agreement.
Subletting (or assigning) the premises to a third party is not permitted.
Two scenarios:
– Total subletting: The subtenant can directly request a lease renewal from the landlord, even if the main lease has been terminated.
– Partial subletting: This could involve, for example, a hotel or restaurant subletting part of its premises to another restaurant with the landlord’s agreement.
In both cases, the tenant must authorize or refuse the renewal of the sublease and must first verify the term of the main lease, as they cannot sublet for a longer period than stipulated in their own lease.
The rent is also revised at the time of commercial lease renewal. For more information on this, click here
*Subletting a commercial lease ensures the same fate as the main lease in the event of non-renewal or termination.
Non-renewal
If the main tenant renews their lease, they must accept the renewal of the sublease. If the sublease is not renewed, they must pay eviction compensation to the subtenant, unless there is a legitimate reason established by law following legal proceedings (e.g., non-payment of sublease rent by the subtenant or the subtenant’s operation of an activity not authorized by the lease or the sublease agreement).
The subtenant can also request renewal directly from the landlord if the tenant defaults.
Lease Termination
Even though sublease agreements are typically for a term of 9 years (or 3, 6, or 9), they terminate at the same time as the main lease when the latter is still in effect but has been terminated, either amicably or, more commonly, as a result of a court decision against the tenant.
Therefore, subtenants must carefully choose their tenant and thoroughly review the lease granted to the hotel, restaurant, or café (HRC) tenant by the landlord. If the tenant engages in an activity not authorized by the lease, or sublets the premises for an activity not stipulated or permitted by the main lease, the subtenant may face the consequences of a lease termination action.
Conversely, the HRC tenant must also regularly monitor the subtenant’s activities to avoid lease termination.
Hotels, restaurants, and cafes (CHR), whether tenants or subtenants, must therefore seek advice from lawyers specializing in CHRD from the drafting of commercial sublease contracts in order to avoid the risk of losing their lease in the event of failure by one of the parties to meet its obligations.