Your Head Lessee has become insolvent. What options do Sub Tenants have?
Your landlord's lease is likely to be "disclaimed" by its liquidators.
This will determine your landlord's lease and your sublease. A liquidator's disclaimer of a lease ends the rights, interests and liabilities of the insolvent tenant in respect of the property; however, the law preserves the rights and liabilities of other parties, including subtenants.
However, where subtenants remain in occupation, and particularly where they occupy only part of the premises covered by the disclaimed lease, the extent of their liabilities and obligations to the head landlord can be unclear and could be more ownerous.
This "implied" lease is crucial to the head landlord's ability to recover costs from guarantors, whose liability is secondary to that of the insolvent tenant. This liability is preserved, only so long as the head landlord does not take possession of the premises.
The head landlord can still serve notice on a subtenant under Law of Distress (Amendment) Act 1908, s 6, requiring sublease rent to be paid directly to it. This mechanism allows the head landlord to recover rent without having to demand it directly from the subtenant, which would amount to taking possession, and would be fatal to any ability to recover against guarantors or former tenants.
Landlords of insolvent tenants will need to act quickly to minimise their losses and protect their property. A number of issues will need addressing. The Landlord will need to establish whether the premises in question can continue to operate while all or part of the rent and outgoings are being paid.
If, as a sub tenant, you want to remain in occupation there are several options you can take.
Within 14 days of notification that your landlord's lease has been disclaimed, you may apply to the court for a "vesting order". If granted, you will be substituted for your former landlord and "ake on" the disclaimed lease. Note that the disclaimed lease obligations may be harsher than your sublease's.
You may remain in the property, provided you perform the obligations in the disclaimed lease. Again, these may be more onerous than those in your sublease.
If, however, a third party with an interest in the property beats you to a successful application to the court for a vesting order (within three months of notice that the lease has been disclaimed), it will "take on" the disclaimed lease and free you from your interest.
You could make your own similar application at this time, but the court decides which application to grant and may refuse yours if it is made more than 14 days after you were notified that your landlord's lease had been disclaimed.
You could contact the head landlord and assert that you are not prepared to "take on" the disclaimed lease. If you think the head landlord is unlikely to re-let soon, you may be able to negotiate new, more favourable terms.
Subtenants-rights & liabilities
The preserved "rights and liabilities" of a subtenant must be those set out in the sublease. If it is a sublease of part of a building then the subtenant's rights and liabilities must relate only to the relevant part and the relevant covenants. If the landlord does nothing, then the subtenant must continue to occupy on the preserved terms of the sublease. There are suggestions that the subtenant must comply with the terms of the disclaimed lease. This could be a blow for the sub tenant as sublease terms are often significantly less onerous than those in the lease and may include a lower rent or diluted repairing obligations.
Vesting orders
After a lease has been disclaimed third parties can apply to the court for what is called a Vesting order against the insolvent party. It basically puts one party as the priority party. It is mainly done by Superior landlords / Freeholders but sub tenants can apply as well. Playing this card the right way can be in your favour as a sub tenant because you can orchestrate it so you refuse a vesting order made by the landlord allowing you to leave the building with no liabilities. Sub-tenants with large amounts of fixtures may find this option impractical.
There is a statute under which subtenants can ask the liquidators in writing to tell them if they are going to disclaim the lease or not. This can be used as a strategic weapon as there is a 28 day window for them to reply and subsequently act.
The liquidators must tell you if the head lease is disclaimed. It could be significant move that the freeholder offers you a moving out deal ahead of any disclaimed lease proposal.
Where the sublease is for part of a building, the courts apply those terms as if the disclaimed lease comprised only the property to which the order relates.
Consequently, a vesting order can apply to a subtenant of part, but must be on terms derived from the disclaimed lease even if they are significantly more onerous.
If the subtenant elects not to take a landlords vesting order, s 182(4) provides that it is then excluded from all interest in the property and can walk away.
Considerations
The landlord must consider its position carefully before applying to make a vesting order in a disclaimed lease on a subtenant, since the subtenant may elect to walk away from the premises.
Where the subtenant occupies on terms that are "softer" than those in the disclaimed lease, or where the landlord wishes to secure vacant possession of the whole premises, applying for a vesting order against the subtenant can serve as an efficient lever, encouraging the subtenant to go.
Where a subtenant is paying a higher rent than the lease rent, the landlord should try to avoid a disclaimer situation arising altogether and seek to agree a surrender of the lease with the tenant's liquidator. With that course, the landlord will automatically take the premises subject to the under lease.
Some lessors are also landlords and their insolvency will affect their own tenants. A couple of the issues that can arise for tenants are the security of rent deposits and any sums held by the landlord for future works under the service charge.
Some subtenants may wish to try and take advantage of a receivership by bringing their own lease to an end through obtaining a disclaimer of the Landlord's Lease, obviously having an adverse affect on the landlord.
Seek legal advice and speak with your head landlord to determine the terms of your landlord's lease, any potential third parties, everyone's intentions and the head landlord's prospects of reletting.