An underlease is a lease that is not held directly from the freeholder, but from a tenant.
- An underlease may alternatively be known as a “sublease” “subtenancy” “undertenancy” “subletting” or “underletting” with similar variations in the description of the underlessee. The tenant’s lease is sometimes described as a “headlease” or “superior lease” and the tenant’s landlord will often be described as the “head landlord” or “superior landlord” or the “freeholder” to distinguish them from the tenant, who in fact will be both tenant of the superior landlord, and landlord of the subtenant. The tenant may be described as the “immediate landlord” of the subtenant and the tenant’s lease may be called the “intermediate lease”.
- The most common way for an underlease to arise is for a tenant to grant one out of their existing lease. The tenant of the existing lease would be the landlord of the underlease created from it. [Granting leases]
- An underlease should be granted to expire before the lease out of which it is created. If it is not, the underlease may operate as an assignment (transfer) of the lease, instead of creating an underlease. [Alienation]
- The terms of the headlease will control whether or not an underlease can be granted by the tenant. If the headlease is silent on this point then there is no restriction on the grant of an underlease. More often though, the headlease will permit an underlease to be granted subject to it complying with certain conditions laid out, and the landlord consenting. [Alienation]
- The ability of a tenant to negotiate an underlease with their subtenant is nevertheless likely to be very restricted by the terms of the headlease that the tenant holds. Where this causes real difficulties, the superior or head landlord who holds the freehold may be prepared to waive or vary the provisions of the headlease to permit the underlease. [Principles of negotiation of new leases]
- Sometimes the easiest way of granting a sublease will be to grant a lease by reference to the headlease i.e. a lease in which you set out the rent and term but otherwise import into it all the same terms as are in the headlease. This should pass on to the subtenant all the responsibilities of the tenant, however it does not relieve the tenant of those liabilities to the landlord, as a direct contract remains between the head landlord and the tenant.
- Where a sublease is being granted, generally two documents are required – the sublease itself, and a licence to sublet which is granted by the landlord. The landlord will usually be represented by their solicitor and therefore the procedure of acquiring or granting a sublease can be slower than would be the case if there were only two parties to the negotiation.
- The same conditions regarding registration requirements and SDLT apply to a sublease as they do to a lease. [Stamp Duty Land Tax]
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Mr A B Smith