Sub-letting

VII. Sub-letting

The Nature of sub-letting and its constraints

‘Sub-letting’ (also known as ‘under-letting’) of a property generally means that a tenant further lets out the property (or part of it) to another ‘tenant’ (known as ‘sub-tenant’) by another lease/tenancy agreement (known as the ‘sub-lease’ or ‘underlease’).

At law, a sub-lease executed between a tenant and sub-tenant is a separate and independent contract from the lease with the landlord (i.e. ‘head-lease’). However, notwithstanding that a tenant and a sub-tenant are generally at liberty to negotiate and agree upon the terms of a sub-lease to be different from the ‘head-lease’ (e.g. additional restrictive covenants to be imposed), the demised area and the term of a sub-lease are confined by the head lease. This is because the tenant has no right/interest to grant any interest in a sub-lease beyond the interest that he had been granted under the head-lease. For example:-

“A owns Flat A and Flat B. A lets Flat A to B for a term of 1 year. However, B entered into a ‘sub-lease’ of Flat A and Flat B to C for a term of 2 years.”

In such scenario, B may be regarded to be in breach of the terms of the ‘sub-lease’ because he had no interest be ‘let’ to C in respect of Flat B and any flat beyond a 1 year period.

Relationship between the tenant and sub-tenant

As between the tenant and the sub-tenant, a tenant may incorporate and enforce the terms and covenants of the ‘head-lease’ by incorporating a covenant under a sub-lease that the sub-tenant shall observe certain covenants under the head-lease. It is generally better practice for the tenant to expressly and specifically set out which covenants are to be complied with and provide a copy of the head-lease to the sub-tenant whenever possible (rather than incorporation by general reference to the ‘covenants of the head-lease’). However, since the landlord is not a party to the sub-lease, such covenant may only be binding and contractually enforceable by a tenant against a sub-tenant.

Effect of termination of head lease on the sub-lease

At law, the right of the tenant to grant a valid estate to a sub-tenant originates from the head lease. This means that, if the head-lease becomes ineffective (e.g. resumption/re-entry by the Government against the landlord or a third party being able to establish that he is the true owner of the land instead of the landlord) or terminated by the landlord for whatever reasons (i.e. non-payment of rent, other kinds of breaches committed by the tenant), the leasehold estate under the sub-lease will also become destroyed. In such case, notwithstanding that the sub-tenant might not be involved in any breach under the sub-lease, the sub-tenant will have no legal right or interest to possess and occupy the property vis-à-vis the landlord (or the Government/third party) and must deliver back the property.

The only possible relief of the sub-tenant is to apply for ‘relief against forfeiture’ from the Court of First Instance under section 58(4) of the Conveyancing and Property Ordinance (Cap. 219) for a ‘vesting order’ to vest the remaining term (or any less term) of the head-lease to the sub-tenant with conditions that may be imposed by the Court (e.g. to comply with any outstanding breaches committed by the tenant). If such discretionary relief against forfeiture is granted, the sub-tenant may be able to ‘stand into the shoes of the tenant’ and continue to occupy the property as if he was the tenant until the expiry of the ‘vested term’.

The inter-relationship between a landlord/tenant/sub-tenant may involve difficult legal concepts and tactical considerations. It is strongly recommended that legal advice should be sought from legal professionals in any of the aforesaid related matters.

Prohibition of sub-letting: If I have found that my tenant has sub-let my property to some other person without my consent, then what can I do to protect my interests?

To prohibit a tenant from sub-letting, it is necessary for a tenancy document to provide for an express clause that prohibits the tenant from subletting the property (or any part of it) to another party. It is also common practice of landlords to extend the prohibition against any act of licensing or sharing/parting of possession or occupation of the property.

If the tenancy document does not contain a clause that restrains a tenant from subletting, then the mere act of subletting of the unit (or part of it) to another person, even without the landlord’s consent, may not be illegal per se (subject to whether the tenant’s sub-letting has contravened any government regulations as explained above). As a tenancy has the effect of passing the landlord’s interests in the property to the tenant during the tenancy period, the tenant may deal with the property in whatever manner as if he owns the property (except for any illegal activities or actions which would amount to a breach of the tenancy agreement), including subletting the property to another party.

Based on the same reasoning, the breach of a prohibition clause on subletting may make the tenant liable to the landlord for injunction and/or damages. In certain cases, it may also enable the landlord to forfeit the tenancy agreement upon such breach.

In practice, even if a covenant against sub-letting is in force and without any other kinds of restriction, a tenant is still at liberty to cohabit, share occupation or use the property with other parties (who are often claimed to be guests, relatives or friends of the tenant). Prima facie, they do not fall within the ambit of ‘sub-letting’.

In the absence of any direct evidence that the tenant is engaging in sub-letting activities of the premises (e.g. copies of signed sub-leases, further partitions being made, admissions made by occupants, advertisements/ invitations made by tenant and excessive consumption of utilities), it is often difficult in practice for the landlord to prove and enforce restrictive covenants against sub-letting.