Forfeiting a lease with undertenants

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This short article looks at the options available to both landlords and undertenants when a landlord wants to forfeit a lease with subordinate interests.

If a landlord forfeits a headlease, the underlease will typically end. Often, a landlord forfeits the headlease because their head tenant is no longer able to pay rent. Typically, in this situation, the landlord will take advantage of the absence of a contractual relationship with the undertenant and obtain vacant possession, with the intention of leasing the property to new tenants at a market value rent. However, in the current economic climate where tenants are harder to come by and commercial certainty is at a premium, occupying undertenants may be attractive candidates for the new lease. The landlord can directly negotiate with the undertenants over the terms of a new lease and, in so doing, limit the period during which the property would not be generating rent. Ideally, the landlord can prepare for this eventuality in advance of any forfeiture by entering into a condition agreement with the undertenants that automatically leases the property to them in circumstances where the headlease is forfeited.

If the landlord does not wish to lease the property to the undertenants (but the undertenants wish to remain in occupation of the property), the undertenants can apply for relief from forfeiture – typically under section 146(4) of the Landlord and Tenant Act 1925. If the undertenants’ application is successful, the court can make an order “vesting… the property comprised in the [head]lease” in the undertenants. The court will also decide the terms of the lease, which usually coincide with the terms of the forfeited headlease. Although a potentially powerful weapon in an undertenant’s armoury, many undertenants are deterred from making s146(4) applications because the court has the power to impose conditions on the lease that, for example, require the undertenant to make good the (former) tenant’s breaches of covenant. Additionally, the undertenant will be required to bear the costs of the application.

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