How to Sublease Commercial Property in New Zealand | NZ Legal

Subleasing can be a smart move if your business has more space than it currently needs. Maybe you over-estimated your footprint, your team has moved to hybrid working, or you are coming to the end of a lease and want to offset costs in the final stretch. Whatever the reason, subleasing allows you to generate income from unused space without walking away from your lease obligations.

But subleasing is not as simple as finding someone who wants the space and shaking hands. There is a legal structure that needs to be followed, your landlord’s rights need to be respected, and the sublease agreement itself needs to be airtight.

Sublease vs licence to occupy — which do you need?

Before getting into the subleasing process, it is worth distinguishing between two different ways of allowing another party to use your commercial space.

Sublease

A sublease grants the sublessee exclusive possession of a defined area of the premises. Exclusive possession means the sublessee can control who enters that space and can exclude others — including you — from it. A sublease creates a legal interest in the property.

Because a sublease gives the sublessee a real property interest, the process is more formal: you need landlord consent, a Deed of Sublease, and ideally a condition report for the subleased area. The sublease must expire before your own lease term ends.

Licence to occupy

A licence gives the licensee the right to use the space but does not grant exclusive possession. The licensor (you) retains control of the premises overall. Licences are typically used for:

• Hot-desking or flexible desk arrangements
• Shared use of meeting rooms or break-out areas
• Short-term or informal arrangements

Licences are generally faster and cheaper to set up. They typically do not require the same level of landlord consent (though you should check your lease). However, because they do not create a property interest, they offer less security to the licensee and less predictable income for you.

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If you are letting out a defined, walled-off portion of your premises for six months or more, a sublease is almost certainly the right structure — not a licence.

Sublease vs assignment — what is the difference?

These two terms are often confused.

• Sublease: You remain the tenant under the head lease. You enter into a new lease relationship with the sublessee, sitting between the landlord and the sublessee. You keep all your obligations to the landlord — including paying rent if the sublessee defaults.
• Assignment: You transfer your entire interest in the lease to the assignee. The assignee steps into your shoes as tenant. You exit the lease relationship (subject to any lingering personal guarantee obligations).

If you want to walk away from a premises entirely and hand it to someone else, an assignment is the right mechanism. If you want to retain your tenancy but generate income from part of the space, a sublease is the right approach.

Step-by-step: the subleasing process

1. Step 1

   Review your existing lease

   Check the subletting and assignment clause in your lease (usually found in the ADLS Sixth Edition at clauses 23–24). This clause will tell you whether subleasing is permitted and what conditions apply.

2. Step 2

   Seek landlord consent

   Most leases require the landlord’s written consent before you can sublease. The landlord cannot unreasonably withhold consent, but they are entitled to know who the sublessee is and to be satisfied about their financial covenant.

3. Step 3

   Find a sublessee

   Engage a real estate agent who specialises in leasing to help you find a reliable sublessee. Due diligence on the sublessee is your responsibility — if they do not pay, you still owe rent to the landlord.

4. Step 4

   Negotiate the sublease terms

   Agree the key commercial terms: area, rent, outgoings, term, permitted use, fit-out allowances. Sublease rents are typically lower than the head lease rent to reflect the shorter term and reduced security.

5. Step 5

   Address building services

   If you are partitioning the space, building services (power, lighting, air conditioning, fire systems) may need to be reconfigured. This may require a building consent and the involvement of engineers and specialist contractors.

6. Step 6

   Execute the Deed of Sublease

   A lawyer should prepare the Deed of Sublease. This document must be signed by the landlord, the tenant (you), and the sublessee.

Step 1: Review your lease

The starting point is your existing lease. Most commercial leases based on the ADLS Sixth Edition contain a subleasing clause that permits subleasing with the landlord’s consent. However, the specific conditions vary — some leases restrict subleasing to portions of the premises above a minimum area, others require the sublessee to be in a compatible business, and some institutional landlords have more restrictive provisions.

Your lease may also specify:

• Whether the landlord can charge for their costs in considering your consent request (legal fees, agent fees)
• What information you need to provide about the proposed sublessee
• Whether the sublease must be in a particular form

Speak with a property lawyer before taking any steps — they can tell you what you are entitled to do and how to approach the process in a way that keeps you on the right side of the lease.

Step 2: Landlord consent

Never sublease without written landlord consent. This is not a formality — subleasing without consent is a breach of your lease and could entitle the landlord to issue a notice of breach and, if not remedied, cancel your lease. Even if you believe the landlord “won’t mind” or “won’t find out,” the risk is not worth taking.

Under most ADLS-based commercial leases, the landlord cannot unreasonably withhold consent. Reasonable grounds for withholding consent include:

• The proposed sublessee has a poor financial track record
• The sublessee’s proposed use is incompatible with the building’s other tenants or its permitted use
• The sublessee has been involved in litigation against the landlord
• The sublessee does not meet a genuine covenant strength requirement set out in the lease

The landlord is entitled to receive enough information to assess these matters: a business profile of the sublessee, references, financial statements, and details of the proposed permitted use.

Step 3: Due diligence on the sublessee

Once you have the landlord’s approval in principle, you need to do your own due diligence on the proposed sublessee. Under the head lease, you remain fully liable to the landlord even if the sublessee defaults. This means:

• If the sublessee does not pay rent, you must pay it to the landlord
• If the sublessee damages the premises, you are responsible for making good
• If the sublessee breaches the permitted use, you are in breach of the head lease

Check the sublessee’s financial position, business references, and proposed use carefully before committing.

Step 4: The Deed of Sublease

The Deed of Sublease is the formal legal agreement governing the relationship between you (as head tenant and sublessor) and the sublessee. A Deed of Sublease under New Zealand law should include:

• The area being subleased — clearly defined with a plan attached
• The term — must expire before the expiry of your head lease. For example, if your head lease expires on 30 June 2027, the sublease must expire no later than 29 June 2027
• Rent and rent review — typically set at a market rate for the subleased area
• Outgoings — the sublessee’s proportionate share, calculated by floor area
• Permitted use — must be consistent with (or a subset of) the permitted use in your head lease
• Copy of the head lease — the sublessee must acknowledge and comply with all relevant obligations in the head lease
• Landlord’s consent — typically evidenced by the landlord signing the deed
• Make-good obligations at the end of the sublease term

GST on sublease payments

If you are GST-registered (which most commercial tenants operating through a company or as a GST-registered business will be), your sublease payments are subject to GST at 15%. You must invoice the sublessee with GST, return that GST to Inland Revenue, and ensure the sublessee has a valid tax invoice.

The sublessee can claim the GST back as an input tax credit if they are also GST-registered.

If you are unsure whether your sublease arrangement triggers GST obligations, speak with your accountant or lawyer before the sublease commences.

Your ongoing obligations as sublessor

Once the sublease is in place, you effectively become the sublessee’s landlord. This comes with responsibilities:

• You must obtain the head landlord’s consent for any variations the sublessee requests (for example, fit-out changes or permitted use extensions)
• You must ensure the sublessee’s rights under the sublease are upheld — including rights to quiet enjoyment
• If the sublessee fails to pay rent or outgoings, you must pay the head landlord regardless
• You are responsible for damage caused by the sublessee to the extent that it affects the head lease

Good communication with the sublessee from the outset reduces the risk of disputes. Set clear expectations about rent payment timing, maintenance responsibilities, and the condition in which the space must be returned at the end of the sublease.

Sublease checklist for commercial tenants

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1. Review the subletting clause in your head lease before taking any steps
2. Confirm the remaining term on your head lease is sufficient to make subleasing worthwhile
3. Obtain written landlord consent before marketing or committing to a sublessee
4. Do financial due diligence on the proposed sublessee
5. Confirm the sublessee’s intended use is consistent with the permitted use in your head lease
6. Engage a building services consultant if partitioning is required
7. Instruct a lawyer to prepare the Deed of Sublease
8. Confirm the sublease term expires before your head lease term
9. Register for GST and issue correct tax invoices for sublease rent
10. Keep communication open with both the landlord and the sublessee throughout the sublease period

This article provides general information about subleasing commercial property under New Zealand law as at October 2022. It is not legal advice and is not a substitute for advice on your specific situation.

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Sources

1. Property Law Act 2007 (NZ)Governs the legal requirements for subleases and assignments of commercial leases.
2. Goods and Services Tax Act 1985 (NZ)GST treatment of commercial sublease transactions.
3. ADLS Commercial Lease (Sixth Edition)The standard form commercial lease widely used in New Zealand, including provisions on assignment and subletting.