When granting an underlease, the tenant needs to be careful not to give the undertenant more than it intended to by inadvertently assigning the headlease.
The grant of an underlease for a term which expires on or after the term expiry date of the tenant's own headlease operates (under the general law) as a deemed assignment of the headlease to the undertenant, regardless of the intention of the parties.
The consequences of this are:
- The undertenant, not the tenant, becomes the direct tenant with the head landlord and the tenant has no right to possession of the premises at the end of the term granted by the underlease;
- The assignment may be in breach of the terms of the headlease and may result in the head landlord acquiring a right to forfeit or a claim for damages;
- If the headlease is a 'new tenancy' under the Landlord and Tenant (Covenants) Act 1995, the assignment may be an 'excluded' assignment meaning the tenant will not be released from its obligations under the headlease;
- The undertenant may have more onerous obligations under the headlease (e.g. repair) than it had agreed in the underlease.
To avoid these headaches any underlease should be drafted so that the term is clearly defined as ending a specific number of days (usually no fewer than three) before the expiry of the term of the headlease.