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A useful reminder of what happens to an underlease when the headlease is surrendered, forfeited or disclaimed?

04 June 2019 #Real Estate


The headlease is surrendered

If this happens then the tenant under the headlease falls away and the tenant under any underlease becomes the direct tenant of the superior landlord and the premises will continue to be occupied by the undertenant on the terms of the underlease.

This is why superior landlords need to retain control over the terms of any underlease by ensuring adequate restrictions are included in the underlease alienation provisions. Such as a  requirement that the underlease will materially follow the form of the headlease.

The headlease is forfeited

This would occur where the superior landlord forfeits the lease due to a breach of the headlease covenants.

In this scenario all interests deriving from the headlease, including any underleases will come to an end.

The undertenant would, however, be free to apply to the Court for relief from forfeiture, and if granted then such relief would allow the undertenant to remain in occupation but for no longer than the original term of the underlease.

The headlease is disclaimed

This might occur where the head tenant becomes insolvent.

In this case the undertenant does not become the direct tenant of the superior landlord as they do with a surrender. Instead, the undertenant retains a set of rights to remain in occupation of the disclaimed premises but as with the forfeiture of a headlease, this will be for a term that is no longer than the original term of the underlease and will be strictly on the basis that the undertenant complies with the terms of the headlease including payment of all headlease rent.

This can be a particularly onerous obligation on the undertenant where the rent under the headlease is higher than the rent payable under the underlease.

The terms of the headlease are not directly enforceable between the undertenant and the landlord but the landlord can re-enter the property for a breach of the headlease terms notwithstanding the fact that the headlease has been determined (although the undertenant would be able to apply for relief from forfeiture).

As the terms of the headlease and the underlease are not directly enforceable between the landlord and the undertenant or mortgagee (unless the undertenant has entered into direct covenants with the landlord, for example in a licence to underlet), the parties are left in an unsatisfactory position if the headlease is disclaimed.

However, the Court has the power to make an order vesting the disclaimed property in any entitled applicant subject to the headlease being on no better or no worse terms than the underlease and provided that it does not include property in addition to that demised by the underlease.

 

Clarkslegal, specialist Real Estate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Real Estate matter please contact Clarkslegal's real estate team by email at realestate@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Simon Ralphs

Simon Ralphs
Partner

E: SRalphs@clarkslegal.com
T: 020 7539 8049
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