A liquidator of a tenant is entitled to disclaim onerous property (including leases). This terminates the rights and liabilities of the tenant under the head lease.
Any person with an interest in a disclaimed lease can apply for the lease to be vested in them within three months from the disclaimer. A head landlord can only apply once any subtenants and mortgagees have refused a vesting order, which has the effect of determining that party’s interest in the property from that point, bringing such sublease or mortgage to an end.
Following a disclaimer of the headlease, any existing sublease will effectively fall away. A subtenant is entitled to continue in occupation of the property subject to compliance with the tenant’s obligations contained within the headlease. The subtenant cannot however enforce the landlord covenants in the head lease, unless:
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there exists a direct relationship between the subtenant and the head landlord through any licence to sublet; or
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the headlease has been vested in the subtenant.
If the subtenant fails to comply with any headlease covenants (including payment of rent) the superior landlord can enforce its rights contained in the headlease (for example, right to forfeit). The disclaimer itself does not result in the head landlord acquiring direct rights against the subtenant, unless such rights exist pursuant to any licence to underlet. Where the head landlord wishes to obtain possession of the property, the Landlord may:
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apply for a vesting order;
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forfeit the headlease on the basis of any breach of the headlease (i.e. insolvency of tenant or non-payment of head lease rent); or
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agree a surrender with the relevant party (i.e. with the tenant’s liquidator prior to disclaimer or with the subtenant thereafter)
Conclusion
The position following insolvency of a tenant and disclaimer of a lease may be unsatisfactory for both the subtenant (occupation cannot continue on the basis of the sublease) and the head landlord (landlord cannot apply for a vesting order with the benefit of a sublease) where there is a substantial term remaining on the sublease. It is recommended that upon becoming aware of a potential insolvency situation the parties consider the possible options and outcomes, seek the necessary advice and where appropriate negotiate with relevant parties to ensure continuation of occupation on mutually acceptable terms.