Underletting at less than the passing or market rent

The following Property practice note provides comprehensive and up to date legal information covering:

  • Underletting at less than the passing or market rent
  • British Property Federation
  • Collateral agreements
  • Reverse premium
  • Drafting suggestions
  • Clear drafting

Underletting at less than the passing or market rent

When property markets suffer a downturn, commercial tenants with properties that are surplus to requirements face significant difficulties in off-loading their liabilities. This is principally because market rents are likely to have fallen below the passing rent under the lease. These leases are often referred to as over-rented.

The options open to a tenant of over-rented property are limited. Often, the tenant's most realistic option is to underlet. This may not enable the tenant to recoup all of its losses but it will at least defray costs as there will be some rental income and the undertenant will bear the other costs of occupation. However, many commercial leases, particularly those drafted in the 1980s and 1990s, restrict:

  1. underletting at less than the passing rent, or

  2. underletting the property at less than the passing rent or the market rent, whichever is higher

This was usually imposed as an absolute pre-condition to an application for consent, leaving no scope for the tenant to argue that it should be subject to the test of reasonableness under the Landlord and Tenant Act 1927.

Although now recognised as potentially onerous, with a consequent depressive effect on rent review, many landlords no longer insist on including this provision in new leases.

British Property Federation

In 2005, the British Property Federation (BPF) and a number of the

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