Landlord and Tenant

When is a Sub-Lease not a Sub-Lease? When it is too long.

The Problem
Hotshot Investment Limited acquires an investment property where the Tenant has inadvertently granted a sub-lease for a term equalling or exceeding its own lease term perhaps only by 3 days. What practical implications does this have for Landlord, Tenant and Sub-Tenant?

The Law
The grant of the sub-lease for a term equal to or exceeding the term of the headlease operates as an assignment (transfer) of the headlease to the Sub-Tenant. The relationship between the Landlord and the Sub-Tenant is then governed by the terms of the headlease. If therefore the terms of the underlease are less onerous than those of the headlease (for example the repairing covenant being limited by reference to a Schedule of Condition) along with his extra few days the Sub-Tenant may get more obligations than he bargained for! The Landlord is entitled to look to the Sub-Tenant to comply with all the terms of the original headlease.

Who can the Landlord sue for breach of covenant?

If the headlease is a "new Lease" for the purposes of the Landlord and Tenant (Covenants) Act 1995 ("The Act") the Tenant will be released on the "assignment" and the Landlord will have lost its right to sue him for any breaches of the Lease. If the Lease is an "old Lease" for the purposes of the Act the Tenant will remain liable either as the original Tenant or as an assignee (if he has given direct covenants to the Landlord in a Licence to Assign). In this case the Landlord must remember to serve notice on the Tenant under Section 17 of the Act within six months of any claim for breach of covenant being made.

Practical Points
Any notices, including Section 146 Notices or Schedules of Dilapidations should be served on the Sub-Tenant (who has become the current tenant). Practically, however, it makes sense to serve any notices on both the Tenant and the Sub-Tenant in order to avoid any possibility that either party can escape liability. The Landlord needs to assess the relative covenant strengths of the Tenant and Sub-Tenant in such circumstances and decide which party would be more profitable to pursue.