Sublease or Property Licence?

By On Your Terms co-founder Natalie Fennell
June 2024

You’re probably familiar with the idea of subleasing a space - it can be a great way for tenants to support a business change. However, if you’re considering sharing your space or after a more temporary option, a property licence agreement might be a great solution instead. This blog looks at the difference between the two, and how to decide what’s right for your business.

How do you sublease a premises?

A commercial sublease is when a tenant (called the ‘sublessor’ or ‘sublandlord’ in the sublease) rents out part or all of their rented business premises to another business (called the ‘sublessee’ or ‘subtenant’ in the sublease). The sublessor keeps the original lease with the landlord, and the sublessee gets to use the space under the sublease terms. This arrangement allows the sublessor to keep the original lease but have help paying the rent.

In a sublease, the sublessor remains responsible to the landlord for meeting the original lease terms, like paying rent and maintaining the premises. The sublessee has an agreement with the sublessor but no direct relationship with the head landlord. This means that while the sublessee must follow the sublease terms, if issues arise, they can raise these with the sublessor but can’t hold the head landlord accountable.

When should I choose a sublease?

Subleasing is great if the tenant wants to keep its lease (or the head landlord won’t agree to end the lease early), or a start-up wants office space but not a long-term commitment.

Here are some examples of when a sublease might suit:

• A tech company decreasing staff numbers due to reduced sales subleasing unused office space to a smaller startup who’s after an affordable, short-term rental option.
• A retailer needing additional storage space during peak seasons but not wanting a long-term commitment.
• A business leasing a large space subleasing rooms to freelancers or smaller businesses, creating a co-working environment that benefits everyone.
• A business with slower than projected growth temporarily subleasing to another business while waiting to see if business picks up.

While subleasing can be good for both sides, it also carries risks. The sublessor remains responsible to the head landlord, meaning if the sublessee defaults the sublessor will be on the hook to the landlord (even if it can’t recover any loss from the sublessee). You’ll also normally need the head landlord's consent to sublease.

What is a property licence?

A property licence is a more flexible arrangement than a sublease. It allows the licensee to use the property for a specific purpose without transferring any ‘interest’ in the property. With a licence, the licensor keeps more control because it doesn’t provide the licensee an ‘exclusive right’ to the premises (as it would with a sublease).

The licensor can also put specific conditions on the use of the property by the licensee and licences are generally easier to terminate than leases, often only requiring one month’s notice.

When should I choose a property licence?

Property licences are ideal for short-term or specific-use arrangements. For instance, for events, pop-up stores, or temporary storage.

Here are some examples of when a property licence might suit:

• A local food truck might use a property licence to operate in a carpark at a seasonal event.
• A retailer might get a licence to set up a pop-up shop during the holiday season.
• A business that needs additional storage space for a few months can use a property licence instead of signing a long-term lease.
• Professionals and freelancers often use property licences in shared workspaces. This allows them to access office amenities and collaborate without long-term commitments

If you’re looking for space, a property licence is a great option if you don’t want a long-term commitment. However, while licences offer flexibility, they come with limitations. The lack of exclusive possession means the licensor can access the property and impose additional conditions. This can create uncertainties if the licensor changes the terms or cancels the licence. Clearly defining the terms and conditions in the licence agreement minimises potential disputes.

Key Differences Between Subleases and Property Licences

The key differences between subleases and property licences are:

How do I choose between a sublease or property licence agreement?

If you’re after space ask yourself these questions: how long will you need it for? Do you want flexibility to cancel the arrangement or is stability more important for your business? Are you happy to share or do you want exclusive access rights? Do you want to make changes to the space?

If you have a retail business you might benefit from the stability of a sublease, while a consultancy might prefer the flexibility of a licence for temporary office space.

A sublease might be more appropriate for a business that wants to customise its office space, but a licence could be the better choice if you need a new space quickly for a short time.

Key Points

Navigating commercial leasing can be tricky, but understanding the differences between subleases and property licences can help Kiwi SMEs optimise their space without unnecessary commitments or costs. Remember:

• Subleases offer stability and control, ideal for long-term needs
• Property licences provide flexibility and are less complex, perfect for short-term or specific use cases. 

Whether you opt for a sublease or a property licence, having a clear, legally sound agreement is essential.

On Your Terms offers comprehensive and customisable Commercial Sublease and Property Licence Agreement designed to meet the needs of sublandlords and subtenants. 

Also check out our Help! How can I get out of my business lease early?! blog.

On Your Terms makes business legals easy for Kiwi SMEs. We help businesses gain peace of mind through our simple online process for purchasing customised, affordable legal documents and tools. By combining human legal expertise with the speed and convenience of technology we offer a new way to legal, including free information, legal resources, and connections with NZ lawyers.