What happens to a sublease when the headlease is surrendered, forfeited or disclaimed?

Where a headlease is surrendered

The intermediate tenant under the headlease falls away and the tenant under the sublease becomes the direct tenant of the superior landlord. This means that the premises will continue to be occupied by the tenant on the terms of the sublease.

For this reason superior landlords will want to retain control over the terms of the sublease by way of restrictions imposed in the headlease’s alienation clause (although it is important to note that even if the underlease is granted in breach of covenant, the underlease will not come to an end on surrender). The head landlord will also want to investigate the terms of any sublease in existence before agreeing the terms of a surrender with the intermediate tenant.

If headlease forfeited

By contrast, if it is forfeited by the superior landlord for a breach of the  covenants, all interests deriving (including a sublease) will come to an end. The subtenant may then apply to the court for relief from forfeiture, however where the subtenant is granted such relief, it would remain in occupation under the terms agreed by the court (for a term that is no longer than the original term of the sublease).

The court’s discretion to grant relief from forfeiture is wide and while the court could grant relief and permit the subtenant to remain in occupation on the sublease terms, it can be difficult for the subtenant to persuade the court this is an appropriate remedy.

If headlease is disclaimed

Finally, if it is disclaimed on the insolvency of the head tenant, bringing to an end all of the intermediate tenant’s rights and obligations, the superior landlord will not become the direct legal landlord of the subtenant.

Instead, the subtenant 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 sublease and will be strictly on the basis that the subtenant complies with the terms including payment of all rent. This can be a particularly onerous obligation on the subtenant where the rent under the headlease is higher than the rent payable under the sublease.

The terms of the headlease are not directly enforceable between the subtenant and the landlord  but the landlord can re-enter the property for breach of the headlease terms notwithstanding the fact that the headlease has been determined . The landlord’s right to re-enter the disclaimed property is subject to the subtenant’s right to apply for relief from forfeiture under section 146(4) of the LPA 1925.

Since the terms of the headlease and the underlease are not directly enforceable between the landlord and the subtenant or mortgagee (unless the subtenant has entered into direct covenants with the landlord, for example in a licence to sublet), the parties are left in an unsatisfactory position if the headlease is disclaimed. To alleviate the situation (in particular, to enable the subtenant to enforce the landlord’s covenants), the court has the power to make an order vesting the disclaimed property in anyone who is entitled to and has applied for the disclaimed property to be vested in them

Accordingly, the subtenant may apply for the disclaimed headlease to be vested in him although this is only likely to occur if the headlease is on better or no worse terms than the sublease and does not include property other than that demised under the underlease.

If you need any advice in relation to a sublease when the headlease is surrendered, please do not hesitate to contact a member of the Commercial Real Estate team.