Leases entered into by tenants at the height of the last real estate boom tend not to be particularly tenant-friendly. Many tenants re-structured during the recession and still hold surplus space which, given the improving economic conditions is now getting sublet. These boom time leases can be difficult to sublet especially when undertenants think they have the upper hand in negotiating heads of terms.
Often the heads of terms for these underlettings specify very short deadlines to get the deals done. What the heads of terms don’t always do though is cater for the restrictions in the terms of the superior leases. These are often less tenant-friendly than the agreed heads of terms, and the relationship between the parties can be irreparably damaged if the undertenant feels that the tenant is seeking to renegotiate points previously agreed in the heads of terms.
For a speedy conclusion of an underlease it is good if the following few points are covered at heads of terms stage -
- Superior lease – does the existing lease permit the subletting and does it have to be inside or outside the security of tenure provisions of the 1954 Act?
- Repair – quite often undertenants will require a limited repair obligation but if the existing lease contains a full repair obligation many superior landlords will not permit this mismatch.
- Rent review – The existing lease may well require the underlease to have rent reviews at the same time and on the same terms, and this may not be realistic or reasonable depending upon the length of the proposed underlease term.
- Alterations – it is common that the undertenant wants more flexibility than as is created by the existing lease. If the heads of terms contain what the undertenant wants they may make the deal conditional on getting consent for their chosen works which the superior landlord cannot be required to deliver.
- Alienation - the same goes for the rights to assign and sub-underlet offered to the undertenant. For example, your lease may be very prescriptive in this regard and sub-underletting may well be entirely prohibited.
If a mismatch exists between what is permitted by a superior lease and agreed heads of terms, it may be possible for a superior landlord to be persuaded to vary the terms of the existing lease or to permit the mismatch, but such negotiations tend to be protracted and may well not have been anticipated when the timeline for the deal was agreed. Even worse, the mismatch will mean that the landlord does not have to be reasonable when formal application for consent is made.
There are a limited number of solutions to the issues we have outlined above but the best way to get an underletting through is to make sure it can be delivered at the outset. Lawyers are happy to advise at the heads of terms stage so they too get a smoother deal to document!
We will be interested to see if the areas of the market in which the landlords again have the upper negotiating hand for new lets creates a new batch of leases which will be difficult to sublet. The shorter lease terms we are seeing may reduce these issues but occupiers taking long term leases now should negotiate for realistic underletting rights.