VocabuLaw

Underlease

What is it and what does it mean?

Description of the legal term Underlease:

An underlease, also known as a sublease, arises within the context of property law in the United Kingdom, and it refers to a legal agreement where a tenant, holding a lease on a property, in turn lets part or all of the property to a subtenant or under-tenant. The original tenant becomes the underlessor while the new tenant becomes the underlessee or subtenant. This arrangement enables the original tenant to retain their lease while granting occupancy rights to another party, often for a specified portion of the original lease term.

It is critical to appreciate that an underlease is distinct from an assignment. Assignment involves the original tenant transferring their entire interest in the lease to a new tenant, while an underlease retains the original lease relationship and simply creates a second, subsidiary lease arrangement. One key aspect is that the underlease cannot exceed the term of the head lease. In other words, it must expire before the head lease does, otherwise it could constitute an assignment.

Legally, underleases are subject to the terms of the original lease. This means that many of the covenants – the obligations and rights set forth in the original lease – continue to bind the underlessor and, in turn, must often be passed down to the underlessee. For this to be managed effectively, the underlease should specify which covenants of the head lease apply to the sublease. Typically, the consent of the superior landlord is required to grant an underlease, and this is a term often enshrined within the head lease.

Underleases can serve various purposes, ranging from business strategy, such as a company looking to reduce office space, to personal circumstances, such as a tenant needing to relocate before the lease expires. It also allows the original tenant to alleviate financial burden by receiving rent from the underlessee without terminating their lease agreement with the landlord.

Nevertheless, the arrangement also comes with its own set of risks and responsibilities. The underlessor remains liable to the superior landlord for the rent and other obligations of the head lease, and must ensure that the obligations imposed upon the underlessee are compatible with these. Furthermore, should the underlessee fail to fulfill their obligations, the underlessor must remedy the situation to avoid breach of their own obligations under the head lease.

Legal context in which the term Underlease may be used:

Suppose a tenant signs a lease for commercial premises with a five-year lease term. Two years into the lease, the tenant’s business model changes, necessitating downsizing and less office space. Rather than terminating the lease, which could incur significant penalties or be impossible if the landlord is unwilling to agree, the tenant may seek to enter into an underlease. They find a smaller business looking for temporary space and agree to lease half of the office for the remaining three years of the term. This business becomes the underlessee, moving into a portion of the space and paying rent to the original tenant. In this scenario, the original lease still holds between the landlord and the original tenant who now also assumes the role of an underlessor, while creating a new, secondary agreement with the subtenant. If done in accordance with the terms of the original lease, this can be a mutually beneficial arrangement.

Consider another example, where a residential tenant needs to move abroad for a year within a two-year lease. They find an underlessee to occupy the property for the duration of their absence. They enter an underlease agreement for that year, ensuring that the underlessee is informed of and agrees to comply with all relevant terms of the head lease. This enables the original tenant to retain the right to return at the end of the subtenancy without having to break the original lease.

The use of underleases plays a vital role in providing flexibility in property arrangements, allowing tenants to adapt to changing circumstances without surrendering their legal rights or interests in the property. By understanding the mechanics and implications of underleases, parties can effectively navigate the property market’s complexities, regardless of unpredictable changes in commercial or personal circumstances.

This website is for informational purposes only and may contain inaccuracies. It should not be used as a substitute for professional legal advice.