The risks of underlease agreements
Categories: News
Sian Wolstenholme, Commercial Property expert, looks at the risks and considerations of taking on an underlease.
At ORJ, our team of commercial property experts are adept at offering advice in all circumstances, whether you are looking to buy or lease a building.
One area in which you need to be particularly cautious is when signing an underlease agreement.
An underlease occurs when the freehold owner of the property leases the building to a tenant – and that tenant decides to sub-let it to another party. There are various situations where this is common practice but, as an example, it could occur at retail units within a train station owned by Network Rail. The properties are generally leased via what is known as a headlease, and then let again to an undertenant as an underlease.
We have a long-standing partnership with a business that specialises in themed café-tearooms at train stations across the Midlands.
We work hard to ensure each lease is legally sound and our client is comfortable with their obligations.
Here are some of the things to consider when agreeing an underlease:
Freeholders’ consent for the underlease
While underleasing is perfectly normal, it is important to ensure the headlease is not subject to any rules and restrictions on subletting. Without the consent of the freeholder, there could be a breach and the underlease would not be valid. The underlease must expire before the headlease. Furthermore, if a headlease ends because the tenant has broken their terms, the underlease could potentially end also.
Our commercial property team can check the terms of the headlease, and indeed the underlease, to ensure you know exactly what you are signing up to.
Permission to alter
When leasing any commercial property, there will be provision in relation to alterations to the building. With an underlease, permission must be sought from the landlord and the head landlord, i.e the freeholder.
For example, in the case of a property on a train station, the head lease might be happy with alterations made, but the changes might not be in accordance with what Network Rail wants.
It is important to obtain written consent from both to avoid costly changes that have to be undone.
Right to renewal
Under the Landlord and Tenant Act 1954 (1954 Act), tenants who lease a commercial property usually benefit from statutory rights to renew their lease at the end of the lease term. A landlord can only refuse this in limited circumstances set out by the Act.
However, an underlease tenant does not have this protection. Therefore, they risk spending substantial money on a property, only to be asked to leave at the end of the agreement.
If you are a good tenant, paying the rent and taking care of the property, this is unlikely, but there are no guarantees.
Dilapidations
Under tenants can be required to comply with the covenants contained in the headlease. The reason why caution is required here is because that can include repair obligations, meaning the landlord could pursue the undertenant for contributions towards maintenance of the whole building. This could include the internal and external aspects of the property and could, therefore, run into many thousands of pounds.
Make sure you are absolutely certain of your obligations when signing any lease – particularly if it’s an older building.
Many people sign leases without legal advice. This is very risky and should be avoided.
Speak to the team at ORJ today to ensure you have the peace of mind to focus on your business. Email team@orj.co.uk or call 01785 223440.