Understanding underleasing

Borneo Martell Turner Coulston

1st September 2019

Legal Briefing

Borneo Martell Turner Coulston

AN underlease is a lease that is not granted directly from the freeholder of a property, but from the tenant of an already existing lease. Sometimes, with commercial property, it is possible to underlet or sub-let the property, depending on whether the freeholder permits this or not.

An underlease may also be known as a sublease or sub-tenancy or other similar variations. An underlease is where a tenant sublets a property granted to them through a lease, by granting a new lease for the same property or part of the same property to a third party. The tenant's lease is usually described as a head lease or superior lease and the freeholder will usually be described as the head landlord or superior landlord.

The tenant will then wear two hats, one as the tenant of the superior landlord and one as the landlord of the sub-tenant.

The most common way for an underlease to be created is for a tenant to grant the lease out of their existing lease. The new lease would be between the tenant (who becomes a landlord) and the sub-tenant. In this situation, there will be no contractual relationship between the head landlord and the sub-tenant.

If an underlease is created, it should be granted to expire before the head lease expires. The terms of the head lease will determine whether or not an underlease can be granted by the tenant. It is common procedure for most head landlords to have a clause within the head lease which permits an underlease to be granted but this would be subject to compliance of certain conditions and the head landlord giving consent.

The scope for a tenant to negotiate an underlease with a sub-tenant is likely to be very restricted by the terms provided in a head lease. It is very common for an underlease to be granted with the permission of the head landlord on the basis that any underlease contains covenants identical to those contained in the head lease. When an underlease is granted, the obligations and restrictions for the tenant remain under the head lease, regardless of whether the sub-tenant complies with their obligations and restrictions or not. Therefore, by granting an underlease, the tenant is not relieved from any liabilities under the head lease.

If a sub-lease is being granted, usually two documents are required, the underlease itself and a licence to underlet which is granted by the head landlord. Therefore, in these transactions there will usually be three sets of solicitors and it would be likely that the landlord's legal fees will be payable by one of the other parties.

When dealing with an underlease, the sub-tenant should be aware that the same rules regarding registration with the Land Registry and rules relating to SDLT applies to an underlease in the same manner that they would apply to a lease direct with the freeholder.

Leases and underleases are substantial and usually complex documents and a head lease will usually set out various requirements that must to be complied with when an underlease is to be drafted. Therefore, it is always strongly recommended that you consult a solicitor when dealing with these types of transactions.

If you would like further information or advice in respect of the above or any commercial property transaction, contact Mohammed Rahman at Borneo Martell Turner Coulston Solicitors at mohammed.rahman@bmtclaw.co.uk or call 01604 622101.