Mondaq Business Briefing -Clarks SolicitorsUnited Kingdom - Problems Ahead for Sub-letting.

(From Mondaq.com)

Article by Derek Ching

As previously reported in our Property Update, a case that may signal the end, in many circumstances, of side deeds, 'Allied Dunbar v Homebase', was then before the Court of Appeal.

Side deeds arise where a sublease is negotiated between a tenant and prospective subtenant but upon terms that are not permitted by the restrictions on sub-letting in the headlease. This may be because market rents have fallen below those payable under the head-lease or because the short duration of the proposed sublease makes a full repairing obligation unacceptable to the proposed sub-tenant. Where a landlord is expected to block any deal which fails to meet the numerous pre-conditions set out in the headlease, the tenant and prospective subtenant are tempted to solve the dilemma by creating a sublease which satisfies the landlord, but also entering into a side deed under which they privately regulate certain liabilities in a manner which departs from the permitted terms without troubling the landlord.

The Court of Appeal have now decided that the landlord (Allied Dunbar) was correct to oppose the tenant's (Homebase) request to sublet. As a result, the appeal judges have made life considerable harder for those tenants wishing to offload unsuitable or difficult to market premises.

The Facts

It is worth briefly revisiting these. Homebase held a 25 year, full repairing lease of a retail warehouse from Allied Dunbar and the rent was subject to 5-yearly upwards only reviews. The subletting provisions included covenants that the tenant was not to sublet without landlord's prior written consent (such consent not to be unreasonably withheld); that the sublease should not reserve a rent less that the full market rent reasonably obtainable without taking a premium, that the sublease should contain covenants by the sub-tenant in the same form as those provided by the head tenant; and that the rent payable by the subtenant would be reviewed on an upwards only basis concurrently with the headlease rent reviews.