Underlease UK — Subletting Leasehold Property, Consent, and Intermediate Landlord Obligations

Obtaining Consent to Underlet — LTA 1988 and the Alienation Covenant

Most leases contain an alienation covenant — a restriction on the lessee's ability to assign, sublet, or charge the lease without the landlord's prior written consent. The alienation covenant can be: (a) Absolute (prohibition on subletting): no subletting is permitted under any circumstances; the lessee cannot sublet at all; breach of an absolute covenant allows the landlord to forfeit; (b) Qualified (prohibition without consent): the lessee can sublet with the head landlord's prior written consent; the landlord cannot unreasonably withhold consent; the Landlord and Tenant Act 1988 (LTA 1988) governs the landlord's obligation to respond to consent applications. LTA 1988 obligations where the covenant is qualified: the LTA 1988 imposes important obligations on the landlord when a lessee applies for consent to sublet: (i) the landlord must give written consent or written refusal within a reasonable time (the statute does not specify a time — courts have treated 28 days as a reasonable starting point, but the reasonable time depends on the complexity of the application); (ii) the landlord cannot impose conditions that are unreasonable (but can impose reasonable conditions — e.g. requiring the underlessee to enter a direct covenant with the landlord; requiring consent to the form of underlease; requiring the underlessee to be of satisfactory covenant strength); (iii) the landlord cannot require payment as a condition of consent beyond the landlord's proper legal and surveying costs; (iv) if the landlord refuses consent, they must give written reasons for refusal within a reasonable time; (v) the burden of proving reasonableness of refusal lies on the landlord (LTA 1988 s.1(6)). Damages for unreasonable refusal: a lessee who suffers loss because the landlord has unreasonably refused (or delayed in giving) consent to sublet can claim damages against the landlord under LTA 1988 (Bocardo SA v S&M Hotels Ltd [1980] 1 WLR 17; International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513). The amount of any underlease rent: where the head lease contains a covenant that the subletting rent must not be less than the head rent (to prevent the head lessee extracting value from the subletting), the landlord can enforce this as a condition of consent.

• Absolute covenant against subletting: the lessee cannot sublet under any circumstances; breach is a serious covenant breach potentially giving the landlord a right of forfeiture; the landlord has no obligation under LTA 1988 where the covenant is absolute
• Qualified covenant — LTA 1988: the landlord must respond in writing (consent or refusal with reasons) within a reasonable time; the burden of proving reasonableness of refusal lies on the landlord (LTA 1988 s.1(6)); unreasonable refusal gives the lessee a damages claim
• Reasonable conditions on consent: the landlord can impose reasonable conditions including: the underlessee entering a direct covenant with the landlord; an approved form of underlease; covenant strength requirements; a condition against further underletting without consent
• Unreasonable conditions: the landlord cannot require payment beyond their own legal/surveying costs; cannot require the lessee to give up their own lease rights as a condition of consent (International Drilling Fluids); cannot use consent as a means of renegotiating the lease terms
• Written application: it is always advisable to make the consent application in writing, providing full details of the proposed underlessee (company accounts or employment references; intended use; proposed underlease terms); this minimises the risk of delay and establishes the timeline for LTA 1988 purposes

Structure of the Underlease — Term, Covenants, and the Fundamental Rule

The fundamental rule of underleases: an underlease is a derivative interest — it is derived from and cannot exceed the head lease from which it is granted: (a) Term: the underlease term cannot exceed the unexpired term of the head lease; by convention, the underlease is granted for a term at least 1 day shorter than the unexpired term of the head lease — for example, if the head lease has 10 years unexpired, the underlease is typically for 9 years and 364 days; this 'minus one day' convention ensures the underlease expires before the head lease (avoiding the underlessee becoming a direct tenant of the head landlord at the moment of head lease expiry, which would occur if the two terms expired simultaneously); (b) Rent: the underlease rent (the under-rent) is paid by the underlessee to the head lessee (as intermediate landlord); the head rent is paid by the head lessee to the head landlord; these are separate obligations; the under-rent can be at any level (it is not required to be the same as or related to the head rent); (c) Covenants in the underlease: the underlessee should be bound in the underlease by covenants that are at least as restrictive as the relevant head lease covenants; the head lessee remains directly responsible to the head landlord for all head lease covenants — the underlessee's covenants to the head lessee are the head lessee's contractual protection against being in breach of the head lease; the underlease should therefore include: (i) a covenant by the underlessee to observe and perform all the head lease covenants (except the obligation to pay the head rent, which is not the underlessee's obligation); (ii) a covenant by the underlessee not to do anything that would breach the head lease; (iii) the head lessee's right to re-enter (forfeit the underlease) if the underlessee breaches; (d) Direct covenant with the head landlord: where the head landlord requires it as a condition of consent to underlet, the underlessee may be required to enter a direct covenant with the head landlord — undertaking to comply with the head lease covenants directly; this gives the head landlord privity of contract with the underlessee (allowing the head landlord to enforce the covenants directly, without going via the head lessee).

• Fundamental rule: the underlease cannot exceed the head lease in term, scope, or rights — it is a derivative interest; an underlease purported to be for a longer term than the unexpired head lease is treated as a concurrent lease, not an underlease
• Minus-one-day convention: the underlease term is always at least 1 day shorter than the unexpired head lease term; this prevents the underlessee from automatically becoming a direct tenant of the head landlord at the moment the head lease expires
• Underlessee bound by head lease covenants: the underlease should require the underlessee to observe all the relevant head lease covenants; the head lessee remains primarily liable to the head landlord and needs the underlessee's covenants as contractual protection
• Direct covenant (privity of estate): the head landlord may require the underlessee to enter a direct covenant — creating a direct contractual relationship between the head landlord and the underlessee; this allows the head landlord to enforce covenants against the underlessee directly without going via the intermediate landlord
• Underlease rent (under-rent): the under-rent paid by the underlessee to the head lessee can be set at any amount; it is not required to be the same as the head rent; where the head lease requires the underletting rent to be no less than the head rent, this is a condition of consent that must be observed

LTA 1954 Security of Tenure for Commercial Undertenants

Where the underlease is a business tenancy (a tenancy of premises occupied by the underlessee for the purposes of a business within the Landlord and Tenant Act 1954), the underlessee has security of tenure under the LTA 1954: (a) Security of tenure against the head lessee: the commercial underlessee has a right to renewal of the underlease against the intermediate landlord (the head lessee) under the LTA 1954 renewal procedure (s.25 notice from the head lessee; s.26 request from the underlessee; grounds of opposition under s.30); (b) Security of tenure if the head lease is not renewed: if the head lease expires or is forfeited (or is not renewed at the end of its term), the underlessee loses their immediate landlord (the head lessee). In this situation, LTA 1954 s.65 provides that the underlessee may apply directly to the court for a new tenancy against the head landlord (the freeholder or superior leaseholder) — but only if the underlessee had security of tenure against the head lessee and the head lessee's interest ends during the currency of the underlessee's tenancy. The head landlord may not have been aware that the head lessee had sublet the property. This is a significant trap for head landlords: (i) a head landlord who allows the head lease to expire or be forfeited (rather than renewing) may find the commercial underlessee claiming a new tenancy directly against them; (ii) the head landlord may have to take on an unwanted commercial tenancy at an under-rent that is below market, or pay compensation to the underlessee if they successfully oppose renewal; (iii) this is particularly problematic where the head landlord is a residential landlord who did not anticipate a commercial undertenant claiming LTA 1954 rights against them. Contracting out of LTA 1954 for underleases: the head lessee and underlessee can contract out of the LTA 1954 security of tenure provisions (s.38A LTA 1954 — the contracting-out procedure requires a statutory warning notice and a declaration by the underlessee before the underlease is granted); contracting out removes the underlessee's security of tenure and avoids the head landlord being exposed to the s.65 risk. It is good practice to contract out of LTA 1954 for all commercial underleases unless the underlessee specifically requires security of tenure.

• LTA 1954 security for commercial undertenants: where the underlease is a protected business tenancy, the underlessee has a right to renewal of the underlease against the intermediate landlord (head lessee) under the LTA 1954
• LTA 1954 s.65 — direct claim against head landlord: if the head lease expires or is forfeited, a commercial underlessee with LTA 1954 protection can apply directly against the head landlord for a new tenancy; the head landlord may not have known the property was sublet — a significant trap
• Contracting out (s.38A LTA 1954): the head lessee and underlessee can exclude LTA 1954 protection from a commercial underlease by following the s.38A procedure (warning notice + underlessee declaration before grant); this protects both the head lessee and the head landlord from the s.65 risk
• Head lessee's exposure: the head lessee who grants an LTA 1954-protected commercial underlease takes on the obligation of a landlord under the 1954 Act — including responding to s.26 requests and serving s.25 notices; if the head lessee fails to manage this process, the underlessee may hold over indefinitely
• Residential long leasehold underlets on AST: residential long leaseholders who sublet on assured shorthold tenancies have full landlord obligations to the AST underlessee under the Housing Acts — including s.11 LTA 1985 repair obligations; the Renters' Rights Act 2025 abolition of s.21 will also affect residential underlessor-underlessee relationships

Intermediate Landlord Obligations and Forfeiture of the Head Lease

The head lessee as intermediate landlord occupies a legally exposed position: they are simultaneously a landlord (to the underlessee) and a tenant (to the head landlord). Key obligations and risks: (a) Intermediate landlord's obligations to the head landlord: the head lessee remains fully responsible for all the head lease covenants — paying the head rent; complying with the repairing and decorating covenants; observing the user and alienation covenants — even where the underlessee is in breach and causing the problem; if the underlessee damages the property, the head lessee must make good the breach vis-à-vis the head landlord (and then pursue the underlessee for the cost); the head lessee cannot plead the underlessee's breach as a defence to the head landlord's enforcement; (b) Forfeiture of the head lease — effect on the underlessee: if the head lease is forfeited (by re-entry or by court order), the underlease automatically falls with it — the underlessee's interest is ended; however, the underlessee has an independent right to apply for relief from forfeiture under LPA 1925 s.146(4); a court granting relief from forfeiture to the underlessee can vest the head lease directly in the underlessee — the underlessee becomes a direct tenant of the head landlord on the terms of the head lease (or on such terms as the court thinks fit); (c) Forfeiture of the underlease by the head lessee: the head lessee (as intermediate landlord) can forfeit the underlease for breach of the underlease covenants — by re-entry (in vacant commercial premises, after the lease has been peacefully re-entered) or by court order; the underlessee has a right to apply for relief from forfeiture under s.146; (d) Notifications: the head lessee must notify the underlessee of any s.146 notice served by the head landlord on the head lessee (s.146(4) LPA 1925) — this gives the underlessee an opportunity to remedy the breach (e.g. pay the arrears of head rent) and apply for relief; failure to notify the underlessee of the s.146 notice can give rise to damages claims from the underlessee if they lose their interest without warning.

• Head lessee's primary liability: the head lessee remains directly and primarily liable to the head landlord for all head lease covenants regardless of the underlessee's conduct; the underlessee's breach does not excuse the head lessee; the head lessee must remedy the breach vis-à-vis the head landlord and then recover the cost from the underlessee
• Forfeiture of head lease — s.146(4) LPA 1925: if the head lease is forfeited, the underlessee can apply directly for relief from forfeiture under s.146(4); the court can vest the head lease in the underlessee — making the underlessee a direct tenant of the head landlord; the underlessee must apply promptly after the head lease forfeiture
• Section 146 notice notification: the head lessee must notify the underlessee of any s.146 notice (breach/forfeiture notice) received from the head landlord; this gives the underlessee the right to remedy the breach and apply for relief; failure to notify can expose the head lessee to a damages claim from the underlessee
• Underlease forfeiture: the head lessee can forfeit the underlease for breach of the underlease covenants (unpaid under-rent; use breach; subletting without consent); the underlessee has the right to apply for relief from forfeiture under s.146; courts regularly grant relief on payment of rent arrears
• Practical protection: the head lessee should (i) take a rent deposit or guarantor from the underlessee; (ii) carry out periodic inspections to ensure compliance with the underlease covenants; (iii) monitor the underlessee's compliance with the head lease pass-through covenants; (iv) ensure the underlease is contracted out of LTA 1954 for commercial subtenants where appropriate

Frequently asked questions