An underlease (or sublease) lets a tenant rent out part - or all - of a leased property to someone else. It’s a handy way for businesses to sublet extra space or for leaseholders to generate rental income. But before setting one up, it’s crucial to check your lease agreement, as some landlords require permission. In this guide, we’ll cover how underleases work, when they’re useful, and what to watch out for.
Understanding underleases
An underlease, also known as a sublease, is a lease created by an existing tenant rather than the landlord. The tenant granting the underlease is known as the undertenant, and they become the landlord to the subtenant. However, the original tenant remains responsible for fulfilling the obligations of the headlease. These include paying rent and maintenance duties.
What does an underlease include?
An underlease typically includes:
Details of the parties involved: Names and addresses of the original tenant and the subtenant.
Lease term: The duration of the underlease, which cannot exceed the length of the headlease.
Rent payment terms: The agreed rent amount and payment schedule.
Property use restrictions: Any limitations or permitted uses specified in the headlease.
Repair and maintenance obligations: Responsibilities of the subtenant for property upkeep.
Subletting restrictions: Any clauses preventing further subletting.
Termination clauses: Conditions under which the underlease can be terminated.
Is an underlease the same as assigning a lease?
No, an underlease is different from assigning a lease. When a lease is assigned, the original tenant transfers all rights and responsibilities to the new tenant, effectively stepping out of the lease agreement. With an underlease, the original tenant remains legally bound by the headlease. This means the original tenant is still responsible for obligations such as rent payments and maintenance.
When can an underlease be used?
An underlease (also called a sublease) allows a leaseholder to rent out all or part of their leased property to another tenant. Here are some common situations where an underlease might be useful:
Businesses subletting office space
Companies leasing large office spaces often don’t use all of it. Instead of paying for unused space, they can grant an underlease to another business, helping to reduce costs and make better use of the property.
Residential landlords
Leaseholders who can’t occupy their property - whether due to work relocations, personal circumstances, or investment purposes - may choose to sublet it using an underlease. However, this is usually subject to the terms of the original lease and may require landlord consent.
Retail and commercial properties
Retailers or commercial businesses with long-term leases may use underleases to rent out unused space, such as a section of a shop, storage area, or warehouse. This allows them to generate extra income while keeping their main business running.
Property investors and developers
Some investors lease an entire building. A headlease can be divided into multiple underleases to sublet different parts to residential or commercial tenants. This can be a profitable investment strategy, but it’s essential to check the headlease terms to ensure subletting is allowed.
💡 Editor’s insight: “If I could give one piece of advice to those looking to grant an underlease, it would be to always check your lease agreement first. This is because some leases prohibit subletting or require the freeholder’s permission. Seeking legal advice from a commercial property solicitor can help ensure you stay compliant.”
What happens to an underlease when the headlease ends?
When the headlease expires or is terminated, the underlease typically ends as well. The subtenant’s rights are directly linked to the headlease. This means subtenants may need to vacate the property when the underlease is terminated unless the superior landlord grants them a new lease. If an underlease holder wishes to continue occupying the premises, they may need to negotiate a new lease agreement with the property owner.
💡 Top tip: If you’re an undertenant, make sure you fully understand the terms of the headlease before signing an underlease. If the headlease ends, your lease does too - unless you negotiate a direct agreement with the landlord.
You can learn more in our guide to what is a headlease.
What is the difference between a headlease and an underlease?
The key differences between a headlease and an underlease include:
Feature | Headlease | Underlease |
|---|---|---|
Who grants the lease | Property owner (landlord) | Existing tenant (undertenant) |
Who pays rent to whom | Tenant pays rent to landlord | Subtenant pays rent to tenant |
Legal obligations | Tenant is responsible to the landlord | Subtenant is responsible to the undertenant |
Duration | Typically longer | Must be shorter than the headlease |
Control over property | Direct leasehold interest | Limited control, subject to headlease terms |
FAQ
Can a tenant create an underlease without permission?
It depends on the terms of the headlease. Some leases allow subletting freely, while others require written permission from the landlord before an underlease can be granted.
Can an underlease be longer than the headlease?
No, an underlease must always end before or at the same time as the headlease. If the headlease expires, the underlease automatically ends too.
Does an underlease holder have the same rights as a tenant?
An underlease holder has rights based on their agreement, but they are still subject to the terms of the headlease. This means their tenancy could be affected if the headlease holder breaches their contract.
What happens if the undertenant stops paying rent?
The original tenant (headlease holder) is still responsible for paying rent to the landlord, even if the undertenant fails to pay. It’s important to include clear rent obligations in the underlease to avoid financial risk.
Final thoughts
An underlease can be a useful arrangement for tenants who wish to sublet a property while retaining their leasehold interest. Before starting it's crucial to review the headlease terms, and obtain necessary permissions. At this point you can draft a legally sound underlease agreement. If you are considering granting or taking on an underlease, seeking legal advice can help ensure compliance and avoid potential disputes.