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Lettings and Sub-tenants

What is the dispute and when might the dispute arise?

It is sensible to let any excess space in your building in order to supplement your organisation’s income. This can be a great way of earning additional income whilst forming links with other local organisations.

However the law relating to letting property is complicated, even more so for a registered charity landlord, and very often property managers are presented with a situation not of their making, with little information as to what exactly has been agreed, or when and how.

Common disputes that may arise through sub-letting are:

•    The Landlord claims you require his consent to sub-let

•    The letting is on less than market rent

•    Your tenant claims they have rights over the property

•    The letting is to a connected person/organisation

•    Your tenant is using the premises for a purpose outside the designated planning use (see Planning Issues section)

For information on the letting process and issues to consider, click here to visit the "Letting" section of our web resources.

What to do if a dispute occurs?

Landlord’s Consent:

Most commercial sub-leases of office space will require landlord’s prior consent, and you may find that this has not been obtained. For more information see Letting section of our website.

It is always best to seek consent where required to avoid future problems. Often a landlord will be agreeable to a sub-letting where it strengthens your position as a tenant by providing income, if the correct legal procedures are followed.

If your landlord raises an objection to you sub-letting your premises there are a number of steps you can take:

  • Review your lease. Your lease should have reference to rules on sub-letting and whether consent is required. Some leases include the terms “...consent not to be unreasonably withheld or delayed...” This means the landlord cannot block a legitimate application to sub-let without good reason. But be aware refusal may be deemed “reasonable” if a landlords requests for additional information, such as accounts, are not met, or the information provided raises doubts as to the suitability of the sub-tenant
  • Find evidence of consent. Look to see whether any consent to the occupation or tenancy has been obtained from your landlord. Look for any correspondence (letters or emails) with either the landlord or his agents that provides evidence of consent.  
  • Consider implied consent. If it is a very long-term occupation, it may be that the landlord knows about it and must be taken to accept it. However if there is no reason why the landlord would know about it then there is a risk that the landlord could seek to take action against you.
  • Negotiate.  Your landlord may be willing to provide a retrospective consent. However be aware they are under no obligation to provide this.
  • Take advice. Professional advice from a solicitor or surveyor may highlight areas for expanding your argument.

The letting is on less than market rent:

Lettings by registered charities are usually subject to section 117 of the Charities Act 2011, which requires consideration of valuation advice by charity trustees before letting, to ensure that they let on appropriate commercial terms. Be aware that Section 117 does not apply to a minority of charities which classify as “exempt”, which include registered charitable housing associations, some educational bodies and Community Benefit Societies. A dispute may arise if the Charity Commission request confirmation of your letting procedure or the trustee board requires confirmation that charity law requirements are being met.

There are a number of points to consider:

Was advice sought prior to the letting? Look to establish what advice, if any, was sought prior to the letting. In England or Wales, the Register For England and Wales Section 117 of the Charities Act 2011 requires that charity trustees take advice in the event of disposing (which includes assigning or subletting) of charity property so that best value is obtained for the premises. This advice needs to be given by a surveyor. See 'Disposing of Charity Land' on the Charity Commission website for the relevant guidance about this. In Scotland, there is no equivalent requirement under Scottish law, but it might still be advisable to obtain professional advice.

Does the tenant have a valid tenancy? Under section 122 of the Charities Act, if an occupier has paid money in good faith for premises let from a registered charity, they will have a valid tenancy.

Does the letting qualify for exemption? Under section 117(3)(c) a charity can let to another charity on less than market rent if that charity has the power to do so. In this situation Section 117 does not apply. Look at your own charity’s powers and at the tenant’s objects to determine whether you meet this exemption.
Can you seek tenant agreement? As a charity, the tenant may be more willing to understand that they should be paying market rent and you may be in a position to gently suggest that the tenancy may not be valid because they should have known that they were paying less than market rent and were therefore not in good faith.  You may be able to grant a new tenancy to them by negotiation.

Is a Legal Notice required? If your tenant does not have a formal lease or their lease has expired, you may rely on section 25 of the Landlord and Tenant Act 1954, which basically requires the tenant either to agree a new lease at a market rent or leave the premises. If the lease is current, unless a rent review is due, you may not be able to increase the rent to market value.

If you have sub-let in breach of charity law, it is important that you show you are taking steps to remedy the situation and procedures are in place for future compliance.

Your tenant claims they have rights to remain:

Your tenant may claim to have a right to remain at the premises, known as “security of tenure”. Under the Landlord and Tenant Act 1954, business tenancies have 'security of tenure'. This means that, except under certain circumstances, your tenant will have the right to a new lease when their current lease ends. You have the right to charge a market rent on the new lease, but most other terms are generally the same.

Does your tenant have a formal agreement? - If an informal arrangement has arisen at the end of a formal lease it is possible that a periodic tenancy may have arisen. This means  that the tenant may have gained security of tenure. For more information on periodic tenancies and security of tenure, please see our section entitled “Jargon Buster”.

Was security of tenure excluded? – The same rules regarding security of tenure apply to your sub-tenant as they do to you as a tenant. For more information on security of tenure, click here.

Negotiate with the tenant. If no permission was sought from the landlord, this type of tenancy is likely to be in breach of both the lease terms and in breach of charity law. Propose a new fixed term tenancy at a new rent, with an agreement excluding security of tenure in the manner authorised by statute (a statutory notice plus a declaration by the tenant that it has received and understood the notice).

Take legal advice. Consider taking legal advice if you are looking to serve a notice under section 25 of the Landlord and Tenant Act 1954, which basically requires the tenant either to agree a new lease at a market rent or leave the premises.

The letting is to a “connected person”:

Under section 117 of the Charities Act you always need Charity Commission consent in order to let to a connected person. Again, be aware that Section 117 does not apply to a minority of charities which classify as “exempt”, which include registered charitable housing associations, some educational bodies and Community Benefit Societies. As defined in Section 118, connected persons can include not only charity trustees, but also any child, parent, grandchild, grandparent, brother or sister of any such trustee, and a “body corporate” in which any such person has a substantial interest.  (NB connected persons include not only employees of the charity, but also a donor of any land to the charity, which can often be overlooked.)  

•    If the arrangement is a valuable source of income for you, the way to deal with the situation is to obtain a valuation more or less compliant with section 119 of the Charities Act 2011.  This applies to a lease of less than seven years duration.  In such a case the trustees of a registered charity must base their decision to let property on the valuation advice of a person who need not be a qualified surveyor as defined in the regulations, but is a person whom the charity’s trustees reasonably believe has the expertise and experience for valuing property of that nature and in that area.  The next thing to do is to negotiate a rental in principle with the tenant that complies with the valuation, and apply to the Charity Commission for an order authorising the grant of the tenancy.  

•    The risk here is that the Charity Commission may take a dim view of what is going on, but generally the Charity Commission is there to get things on the right lines, and hopefully they would be happy to authorise the grant of a lease on open market terms.  

•    If the trustees wish to avoid embarrassment, they can point out to the tenant that the tenancy was unlawful and they will have to leave.  The Charity Commission does effectively have power to cancel the tenancy if the tenant does not agree.  


The Foundation would like to thank Russell Cooke LLP for their contribution to this Property Advice section of the website.