What Is a Headlease and the Three-Tier Structure
A headlease is a lease granted by the freeholder to an intermediate lessee (the headlessee), who may then grant subleases to occupying tenants. The headlessee is simultaneously a tenant of the freeholder and a landlord to subtenants. The sublease term cannot equal or exceed the remaining headlease term. The headlessee owes performance of all covenants upward to the freeholder while simultaneously enforcing obligations downward against subtenants. Misaligned covenant structures (where the headlease requires the headlessee to repair the entire property but the subleases are silent on repair) create the most common structural liability. Multiple occupiers can exist simultaneously — Wheat v E. Lacon & Co Ltd [1966] confirmed that both a freeholder and a lessee can be occupiers in control of the same area.
Headlessee Obligations — Upward and Downward
Upward (to freeholder): pay headlease rent promptly; comply with all covenants (repair, insurance, use, alienation); comply with planning and statutory obligations; pay any service charge for common parts. Downward (to subtenants): residential subleases impose HA 1985 s.11 implied repairing obligations (cannot be excluded); HHSRS compliance; mandatory and selective licensing where applicable; gas, electrical, and fire safety compliance; deposit protection; required statutory information (EPC, How to Rent, gas safety certificate). Forfeiture risk: breach of headlease covenants can result in forfeiture by the freeholder — extinguishing all subleases; subtenants can apply for a vesting order under LPA 1925 s.146(4) to have the headlease vested in them directly. Insolvency: subtenants can apply for a vesting order to preserve their interests.
Alienation and Practical Risks
Qualified alienation covenants require the freeholder's consent (not to be unreasonably withheld — LTA 1927 s.19(1)). Many headleases require subtenants to enter into direct covenants with the freeholder. On assignment of the headlease, the outgoing headlessee is released under the post-1995 Act regime but may need to give an AGA. Pre-acquisition due diligence: review the full headlease, check term remaining (below 80 years is not mortgageable; below 125 years triggers the LTA 1993 extension right for residential headleases — 90-year extension on zero ground rent). Structural risks: service charge misalignment; double insurance; failure to comply with headlease repair obligations. Relief from forfeiture: if a s.146 notice is served, take immediate legal advice — the application must be made promptly.