Underletting

Question 1

What is the difference between assignment and underletting?

Answer 1

With underletting the tenant does not pass its leasehold interest on entirely, instead it grants an underlease to an undertenant

Question 2

What is the rule in relation to terms and the underletting?

Answer 2

The term of the under lease must be for a shorter term than the lease itself, even if only a day shorter

Question 3

Following an underlet, what is the position of the original tenant?

Answer 3

The original tenant is still the tenant of the landlord and must pay rent and ensure the other lease obligations are performed.

The tenant is however the landlord of the under tenant and will collect rent from them to pay its own lease.

The tenant can also enforce the undertenant’s covenants to ensure that the tenant does not fall foul of its own covenants to the landlord

Question 4

Why would a tenant underlet?

Answer 4

• they are not using all of the premises, and it is possible to underlet the part they are not using
• they do not need the premises at the moment, but are likely to do so in future
• they cannot find a willing assignee, but can find a willing undertenant

Question 5

If the lease is silent, what is the position of the tenant hoping to underlet?

Answer 5

They are free to underlet

Question 6

What is the effect of qualified covenant in relation to underletting?

Answer 6

Automatically converted into a fully qualified covenant whereby the landlord can only reasonably withhold consent and must make a decision within a reasonable time

Question 7

What is the situation with privity of contract following the underletting?

Answer 7

• Privity of contract exists between the landlord and the tenant
• It also exists between the tenant and the undertenant.
• However, it does not exist between the landlord and the undertenant.

Question 8

What is the situation with privity of estate following the underletting?

Answer 8

• Privity of estate exists between the landlord and the tenant
• It also exists between the tenant and the undertenant
• However, it does not exist between the landlord and the undertenant.

Question 9

If there is neither privity of contract or estate between the landlord and the undertenant, what will the landlord want to do?

Answer 9

Covenant directly with the landlord

Question 10

What terms are interchangeable with underlet and undertenant?

Answer 10

Sublet and sublease and subtenant

Question 11

What should the landlord’s solicitor do on pre-exchange?

Answer 11

• take instructions
• consider application to underlet
• if landlord is happy in principle, request undertaking for costs and issue draft licence to underlet to tenant’s solicitor

Question 12

What should the tenant’s solicitor do on pre-exchange?

Answer 12

• take instructions
• apply for consent to underlet
• prepare draft lease and if relevant, agreement for under lease
• deduce title and respond to any queries on title
• answer pre-contract enquiries
• once agreed, engross the agreement for under lease, obtain tenant’s signature and send counterpart to under tenant’s solicitor

Question 13

What should the undertenant’s solicitor do on pre-exchange?

Answer 13

• take instructions
• review draft lease and agreement for lease and amend as required
• review draft licence to underlet
• investigate title and raise any queries on title
• raise pre-contract enquiries and search
• arrange for undertenant to sign counterpart lease

Question 14

What will the landlord’s solicitor require from the tenant’s solicitor before beginning work on the underletting?

Answer 14

An undertaking for costs

Question 15

What will the underlease require in relation to the obligations?

Answer 15

That obligations will be no less onerous than the tenant’s

Question 16

What are the two ways by which an under lease can be created?

Answer 16

• full lease
• lease by reference (to the tenant’s lease)

Question 17

What searches should the undertenant’s solicitor do?

Answer 17

The same as you would do with a grant of lease

Question 18

How will the tenant’s solicitor deduce title?

Answer 18

• if the lease is over seven years, then the tenant need only provide an official copy of its registered leasehold title
• if the lease is seven years or under, then the tenant will need to provide an official copy of the landlord’s freehold title together with a copy of the lease.

Question 19

What will happen on exchange?

Answer 19

• the tenant’s solicitor and undertenant’s solicitor exchange in similar manner as for a freehold contract (usually adopting Law Society B)
• no deposit is usually payable
• the agreement for lease may set a fixed completion date, but more likely will set out what conditions need to be satisfied and by when for completion to take place
• the agreement for underlease will usually have a draft of the agreed form of underlease annexed to it, so it can only be exchanged once the terms of the underlease have been agreed

Question 20

What should the landlord’s solicitor do on pre-completion?

Answer 20

Engross agreed form of licence to underlet and circulate for execution and obtain landlord’s execution to licence to underlet

Question 21

What should the tenant’s solicitor do on pre-completion?

Answer 21

• prepare original and counterpart under lease, obtain tenant’s signature to original and send counterpart to under tenant for signature
• prepare and send a completion statement detailing the money due on completion (eg any apportioned annual rent, service charge and insurance rent)
• obtain tenant’s execution to licence to underlet

Question 22

What should the undertenant’s solicitor do on pre-completion?

Answer 22

• arrange for under tenant to sign counterpart underlease
• obtain funds from client needed to complete as per completion statement
• raise pre-completion searches
• obtain undertenant’s execution to licence to underlet

Question 23

What search should the under tenant’s solicitor carry out on pre-completion?

Answer 23

OS1 if underletting of whole of tenant’s interest and lease is registered

OS2 if for part of tenant’s interest and lease is registered

OS3 if under lease is not registrable for tenant’s lease is registered

Question 24

What happens on completion?

Answer 24

• the parties’ solicitors agree to date and complete the licence to underlet
• the undertenant’s solicitor sends the tenant’s solicitor the completion monies
• the tenant’s solicitor and undertenant’s solicitor agree over the telephone to complete and date the executed underleases that they are holding
• the tenant’s solicitor and undertenant’s solicitor send the completed original and counterpart underleases to each other

Question 25

What happens on post-completion?

Answer 25

- Tenant’s solicitor will send notice of underlease to the landlord’s solicitor - The Undertenant’s solicitor will: * Arrange to submit SDLT or LTT return and pay appropriate SDLT or LTT if necessary * Register underlease if necessary

Question 26

Why will there be a requirement for the landlord's consent to assign or underlet to be in form of a deed?

Answer 26

Lessens risk that landlord may inadvertently consent to something they don't want to

Question 27

Will the license to assign or underlet be open ended?

Answer 27

No - normally a time limit to consent granted

Question 28

What may the landlord stipulate in a licence in relation to covenants?

Answer 28

Landlord may contain requirement that assignee or under tenant directly covenants with them to comply with tenant's covenants May require authorised guarantee agreement for outgoing tenant on assignment

Question 29

Following assignment or underletting, what will the tenant have to give to the landlord?

Answer 29

Formal notice that the transaction has been completed

Question 30

How can a tenant alienate their lease by creating charges?

Answer 30

- A commercial tenant may do this as part of a floating charge over their business generally. The bank taking the charge will want the benefit of the lease if taking the business into administration. - A residential leaseholder will do this when taking a mortgage.

Question 31

How can a tenant alienate their lease by sharing occupation?

Answer 31

May share with third party Usually commercial leases will allow sharing within group companies

Question 32

What requirements does the Code for Leasing Business Premises have in relation to alienation?

Answer 32

- Lease should allow tenants to assign or underlet the whole of the premises with the landlord’s consent not to be unreasonably withheld or delayed - Leases should allow tenants to share with group companies without consent. - Leases should allow tenants to charge the lease to a bank or reputable lending institution without consent (with a limited exception).