Like all areas of business, things do not always go to plan in the world of conveyancing. It is always important to know exactly what you are getting into, and what type of people you are dealing with before even thinking about entering into a contractual agreement. Subletting, a popular way for tenants to let part or all of their home to someone else, is one of these areas that requires careful consideration.
This isn’t always as easy as it sounds.
One unlucky businessman faced losing over £90K after he was caught in a subletting scam, and while we cannot blame him for being enthusiastic about getting his new venture underway there are certainly some more cautious steps that he could have taken to avoid the mess he has found himself in.
The case in question:
The case today concerns two restaurateurs, Mr Choi and Mr Park. Looking to start a new business in Kingston upon Thames, Mr Choi entered into a subletting agreement with Mr Park, whereby Park would sublet a commercial premises to Choi in exchange for funds.
What Choi was not aware was the fact that Park had not received permission for this sublet from the property’s landlord. This is a vital part of any subletting. The lack of permission can make it an illegal deal.
Choi paid a fee of £60,000 plus a monthly payment of £9,500 to Park for the use of the property. On top of this, Choi redecorated and rebranded the property, calling it Big Burger. He put much effort, care and money into what he thought was a legitimate property from which to run his business.
Of course, when the landlord found out that Park had been subletting the premises to Choi, he retook possession of it and essentially kicked Choi out.
Choi then also found out that Park had lied to him about the lease length, by which the lease was due to run for only less than 5 years instead of ‘16 years’ that Park had claimed.
What happened next?
Choi claimed that he had entered into the agreement with Park to rent the premises, pending assignment of the lease, as a consequence of false statements made by Park, and that he had, consequently, suffered a hefty financial loss.
Park did not take this lying down. He contended, among other things, that:
- he had not been acting in his personal capacity when he had entered into the agreement with Choi;
- Choi had been aware that the agreement was an illegal sublet, not an assignment of the lease; and
- he had simply expressed a willingness to assign the lease at some point in the future, subject to payment of the rent
What claims did Choi bring against Park?
There were a total of 5 claims brought against Park. They were:
- fraudulent misrepresentation
- breach of contract, said to be implied into the agreement;
- a total failure of consideration (a financial claim in respect of the payments made to the defendants);
- quantum meruit (a financial claim for the return of the value of works Choi had carried out at the premises); and
- unlawful means of conspiracy
The results:
Obviously there was some back and forth contesting between the two parties, but essentially in the end Park was judged with not giving Choi the full picture, therefore misleading him into accepting the unlawful agreement.
The law is well established in dealing with cases such as this. It states:
‘Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages… unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true’
If Choi have had access to all the correct information, it was held by the Court that he would never have entered into the deal. It cost him dearly, both financially and mentally. As a consequence of the false statements made by Park, Choi had suffered loss. Therefore, Choi’s claim for misrepresentation succeeded and he was able to regain his money, a sum of £91,532.52.
What can we learn from this subletting case?
There are a few lessons we can learn from this case, mainly concerning the importance of due diligence in business transactions and serious consequences it may lead to in failing to do so.
If a person is deceived, such as the case with Choi in the above case, they are normally able to sue the person who misled them. In this case, Mr Park was the deceiver as he had provided false statements in order to convince Choi to enter into a contract with him.
But it is not always as easy as that.
Even if the innocent party is found to be due compensation from their deceiver, he/she may not be compensated for various reasons. The deceiver may have vanished (say, moving to other part of the world), or simply not have the means to pay up (such as becoming bankrupt). This can potentially lead to the innocent party spending even more time and money, and experiencing more stress, for essentially no reward.
The most effective preventive measure is always not to enter a business transaction unless you have carried out sufficient background check, to know the business, the property and the person. Should Mr Choi have done so, or engaged a lawyer to do so, he would have found the remaining term of the lease and whether permission was required from the landlord, rather than relying on Mr Parker’s misstatement. He would not definitely have rushed into the transaction and found himself experiencing so much hassle and trouble. It is purely a matter of chance to some extent that Mr Choi has managed to recover his loss.
What else could Mr Choi do if he was unable to recover his losses from Mr Park?
In theory, Mr Choi might be able to apply to the Court to intervene. One possibility would be for the landlord to forfeit the lease and grant it to Mr Choi, provided that the landlord is satisfied that Mr Choi is a person of good standing.
However, it should note that such action is more down to the landlord’s discretion, rather than Mr Choi’s right. Unless Mr Choi has evidence to prove that the landlord had been aware that he was trading in the property as a tenant (in fact, in this case, Mr Choi had none of such evidence), the landlord could well refuse his request. Even if the landlord is willing to grant a new lease to Mr Choi, clearly he/she will expect Mr Choi to bear all the relevant costs, which is likely not to be low.
How to correctly contract a sublet?
When trying to contract a sublet, it is vital that you first read the initial lease thoroughly to see whether any approval is required (in most cases, the answer is a yes). If so, no subletting can be lawfully made without such approval.
The last thing you want to do is risking it . It is not worth it and the chances of being found out can be very high.
The landlord will then have right to repossess the property and evict you. You may lose not only the monies you have paid to the tenant, but also all your investment in promoting the business, your time and energy.
Once you know the landlord’s approval is required, you need to provide evidence of your relevant trading experience, credit rating, business plan and even immigration history for the landlord’s consideration.
Although a landlord has right to decide how he can let into his/her property, most leases will provide that he/she cannot refuse such approval unreasonably; otherwise, the outgoing tenant can challenge him/her.
Once the approval is granted, it will be prudent to have a lawyer to check out thoroughly about the property, business and the contracts so that there will be no other issues which may affect your business in the future.
Any other issues? Contact us!
Our team here at Lisa’s Law is highly knowledgeable in this area. If you have any questions relating to this topic, or have any other legal enquiry, please do not hesitate to contact us on 020 7928 0276 or email into info@lisaslaw.co.uk.
