We have covered Scots law sublease considerations for landlords in a previous blog. Here we look at what happens to a sublease in the scenario where the lease is terminated early by irritancy (forfeiture), and the available protections for a subtenant. We also look briefly at the differences between Scots law and English & Welsh law.
Irritancy
Under Scots law, generally a landlord can terminate a lease – subject to notices and the tenant right to remedy – on tenant breach. There are no automatic rights or protections for a subtenant if the (head) lease is terminated by irritancy. In that situation, the sublease would automatically terminate on the same date as the lease. The subtenant would lose all rights under the sublease and, most importantly, would lose the right to occupy the premises.
Can a subtenant get irritancy protection?
Lease irritancy can be a real concern for subtenants. In Scotland, a subtenant might be able to mitigate this risk by entering into a direct agreement with the landlord known as an Irritancy Protection Agreement (IPA). There is no prescribed form of IPA but general market standard terms. An IPA essentially preserves the subtenant's right to occupy if the lease is irritated. It would typically oblige the landlord to notify the subtenant about the lease irritancy; and, on lease termination and if requested to do so by the subtenant, grant the subtenant a direct lease on similar terms to the sublease, including for the remaining term of the sublease. The IPA would not typically oblige the subtenant to take a lease directly from the landlord; it's usually at their option.
Requesting an IPA might be done as part of the initial application to the landlord for consent to the sublease. Alternatively, it may be tabled direct by the subtenant to the landlord at a later date, if the subtenant becomes concerned that the tenant might be struggling financially or otherwise in breach of the lease.
There is no obligation on a landlord to enter into an IPA – it's purely a commercial decision. If the subtenant has a strong covenant the landlord may grant the IPA to secure the income; or it may want the ability to take the premises back and relet on the open market. In either case the landlord should review the sublease before deciding as it may have to adopt those terms in the direct lease. The landlord may also require additional financial protection from a subtenant (e.g. a guarantor). Such requirements can be recorded in the IPA.
It is worth flagging that in the event of a sale by the landlord, the buyer is normally required to regrant the IPA in favour of the subtenant to ensure ongoing protection for the subtenant.
What if there is a lease guarantee?
Matters are complicated slightly when there is a guarantee in place over the lease. A guarantee on standard Scots law terms would usually oblige the guarantor (if called upon by the landlord within a certain timescale after certain tenant breach trigger events) either to take an assignation of the lease or to enter into a new lease on (more or less) the same terms for the remainder of the duration. Tenant breach entitling the landlord to irritate includes tenant insolvency, but is subject to insolvency law (which is beyond the remit of this blog). Looking at this from the subtenant's perspective, they are protected if the landlord exercised the option for the guarantor to take an assignation of the lease from the tenant. As the lease remains in place, with the guarantor stepping into the tenant's shoes and becoming the tenant, the sublease is preserved too.
However if the landlord irritates the lease and there is an IPA in place, depending on the IPA terms it may not be able to require the guarantor to take a new lease. Instead it may have to grant the subtenant a new direct lease under the IPA. The landlord therefore needs to be alert to this interface between the provisions of each of the guarantee and the IPA.
There are therefore a number of considerations for the landlord when a subtenant requests an IPA, and also when considering terminating a lease by irritancy where there is a sublease in place. Those considerations depend on numerous factors, including the financial covenant of the tenant and subtenant, the term of the lease and sublease, and the landlord's overall intentions and requirements for the premises.
What is the position in England and Wales?
The equivalent action to irritancy in England and Wales is forfeiture. Unlike in Scotland, tenants in England and Wales can seek "relief from forfeiture" from the courts, which reinstates their lease usually on the condition that the breach is remedied. Where the tenant successfully applies for relief from forfeiture, both the lease and any sublease would be reinstated.
However, subtenants can also apply to the courts directly for relief from forfeiture. The subtenant may apply for the grant of a new lease in its favour from the landlord directly on such terms as the court sees fit, or for the tenant's lease to be vested in (allocated to) the subtenant instead. The court has a wide discretion whether to grant relief. Were it to do so, however, in both cases, the subtenant would become the direct tenant of the landlord going forward.
Subtenants in England and Wales do not, therefore, require an IPA. They should, however, still seek to ensure that the sublease obliges the tenant to comply with the terms of its lease to try and avoid the issue of forfeiture arising in the first instance.
Key takeaways
Whilst irritancy in Scotland and forfeiture in England and Wales are general terms for a landlord's right to terminate the lease on tenant breach, the processes and implications of irritancy and forfeiture are different. Likewise, the implications and available protections for subtenants on termination of the lease by irritancy are different to termination of the lease by forfeiture. In both jurisdictions, different options may be more or less suitable to the landlord depending on the circumstances. That needs to be borne in mind by a landlord when considering their options on tenant breach.