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Can a landlord be subject to an unlawful sublease?
There is a general rule that establishes a landlord can never, upon the expiry or termination of a tenancy, be bound by a sublease (whether created lawfully or not).
Notwithstanding this rule, landlords should be aware that there are three situations in which a landlord can be subject to an unlawful sublease that has, against its will, been foisted upon it.
Note: For the purposes of this article, an ‘unlawful sublease’ is a lease granted by a tenant to a subtenant in breach of the terms of the head lease (e.g. without the landlord’s consent).
Set out below are the three scenarios whereby an unlawful subtenant may have established a valid lease:
1. Where an unlawful sub-tenant successfully applies for relief from forfeiture
If a lease is forfeited by the head landlord, an unlawful subtenant can apply for relief from forfeiture where a sublease has been granted.
The rules governing applications for relief from forfeiture are complex and can often go against the landlord, despite the unlawful status of the subtenant. If relief is granted, it will create a new lease in favour of the subtenant. The terms of that new lease are entirely at the discretion of the court.
The court, in determining an application for relief from forfeiture, has wide discretion in determining whether to grant relief and on what terms it should be granted. However, landlords can take some comfort from the courts general approach in these cases, whereby the discretion to grant relief to a subtenant (and, even more so, to an unlawful subtenant) has been exercised sparingly because it thrusts upon the landlord a person or entity that it never accepted to be a tenant and creates a contract between them.
Also, the court will take into consideration the fact that the tenancy is unlawful when exercising its discretion.
2. The application of the Landlord and Tenant Act 1954 in continuing an unlawful sublease
The second situation whereby a landlord can become bound, against its will, by an unlawful sublease is as a result of the operation of the Landlord and Tenant Act 1954 (‘the Act’) on determination of a head lease.
The subtenant will first have to overcome the hurdle of satisfying the legislation that there was the existence of a business tenancy at the time of expiry of the head lease. Provided it can demonstrate this, the Act can operate to extend a sublease beyond the expiry of the term of a head lease.
The case of D’Silva v Lister House Developments Ltd  found that an unlawful sublease with security of tenure under the Act could survive the determination of a head lease, with the result that the head landlord would become the direct landlord of the unlawful subtenant.
This decision was followed in a more recent case (Brimex Ltd v Begum ) where the court applied the Act again to create a landlord and tenant relationship between the head landlord and the unlawful subtenant on determination of the head lease.
If the Act is applied in this way to create a lease between head landlord and subtenant on determination of the head lease, a landlord may take some comfort from the following available options:
- A damages claim could be brought against the former head tenant for breach of the alienation covenant in the head lease – but this would be worthwhile only if the former head tenant is solvent.
- A claim could be brought against the unlawful subtenant for an injunction requiring the subtenant to surrender its tenancy. Case law has recently favoured the landlord and imposed an injunction against the unlawful subtenant (Crestfort Ltd v Tesco ) where it was found that the subtenant, when it accepted its sublease, committed a tort by knowingly and intentionally causing the breach of the alienation covenant in the head lease (e.g. where a subtenant accepted a sublease that it knows is in breach of the head lease).
- The landlord could terminate the unlawful sublease and oppose any application for a new tenancy under the Act where it satisfies one of the limited grounds of opposition (i.e. where the landlord wants to take possession of the property for its own purpose) that are available to the landlord under the Act. However, the landlord needs to ensure that it serves all the relevant notices within the required time periods under the Act to oppose using one of the grounds.
3. An unlawful sublease survives a surrender
The third situation in which a landlord and tenant relationship may arise between landlord and unlawful subtenant is upon application of the common law exception to the general rule that subleases automatically fall on determination of a head lease. That exception applies where the head lease has been surrendered or merged.
Following a surrender or merger of a head lease, the head lease is treated as notionally continuing for the purpose of preserving the sublease. This will, in effect, create a direct landlord and tenant relationship with a subtenant, again, regardless of the unlawful nature of the sublease.
It is clear that the law can operate unfavourably towards a landlord in the above situations. Despite the limited options noted above, it is always prudent for a landlord to ensure it is fully aware of who is occupying its property (through regular lease compliant inspections of the property for example). When negotiating a surrender or merger, or considering determination of the head lease for any other reason, it is essential that the landlord is aware of what subleases are in place (lawfully or unlawfully) and in turn what rights have arisen by the existence of the same.