Underlettings - avoid picking up the landlord's dilapidations tab!
Author: Georgina Burrows
Applies to: England and Wales
Potential undertenants must be alert to the full extent of their repairing obligation, especially if their immediate landlord has been in occupation for a significant period of time.
Steps can be taken to mitigate the undertenant's position but only at the point at which the underlease is being negotiated.
Undertenants often agree to take on a full repairing liability. This may be expressly agreed in heads of terms, or simply implied by the fact that it is a requirement of most headleases that any underlease is granted on the same terms. Undertenants may not be aware that the obligation to 'keep' the property in repair has been interpreted to mean 'to put and to keep in repair'. This can result in a more extensive and costly repairing burden if the property was in a state of disrepair at the time the underlease is entered into.
Underleases typically include a covenant by the undertenant to perform the tenant covenants in the headlease and those which will include the headlease repairing obligation. The head landlord will often require a similar covenant in the licence to underlet.
Recently we acted for an undertenant who proposed to take an underlease of part of a floor of a building, for a short term. It had agreed to assume a full repairing liability. However, the landlord had been in occupation of the whole building under its headlease since 2001. This meant that the undertenant would, in effect, have taken on liability for disrepair that had built up over the previous 16 years.
Despite the fact that the superior landlord was entitled to insist that the undertenant took a full repairing liability, we were able to successfully negotiate that this would have been onerous and unreasonable in the circumstances. The superior landlord and landlord agreed to limit the undertenant's repairing liability by reference to a schedule of condition.
Prospective undertenants should establish the state of repair of a property early in negotiations, and identify any potential repairing costs. If necessary, negotiate at heads of terms stage that the underlease repairing liability will be limited to a comprehensive schedule of condition which is annexed to the underlease. If possible, agree also with the superior landlord that the undertenant should not be required to perform the repairing obligations in the headlease.
After all, no one wants to pick up somebody else's tab!
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.