Tenants that are unable to assign leases often sublet their premises. However, not all subtenants are prepared to accept a lease on the same terms as that of the tenant, and an application for a licence to underlet on different terms may be refused. Some tenants seek to sidestep this problem by entering into a sublease that complies strictly with the tenant’s lease. The terms of the sublease are then supplemented by a collateral agreement, in which another company associated with the tenant agrees to indemnify the subtenant against rental or other liabilities arising under the sublease: see Crestfort Ltd v Tesco Stores Ltd [2005] EWHC 805 (Ch); [2005] 3 EFLR 25; [2005] 37 EG 148.
Lyndendown Ltd v Vitamol Ltd [2007] EWCA Civ 826; [2007] PLSCS 152; [2007] 29 EG 142 (CS) examined the effect of a collateral agreement in which the tenant’s parent company had agreed to indemnify the subtenant against the cost of complying with most of the repairing obligations in the sublease. The dispute arose in the context of the landlord’s action against the tenant for terminal dilapidations under the lease.
The tenant’s lease expired while the subtenant was in occupation. The sublease was protected by Part II of the Landlord and Tenant Act 1954. The tenant sought the protection of section 18 of the Landlord and Tenant Act 1927, which caps damages for breaches of repairing obligations by reference to the diminution in the value of the landlord’s reversion. The tenant argued that the landlord was entitled to the benefit of the repairing obligations in the sublease. It cited Family Management v Gray [1980] 1 EGLR 46; (1979) 253 EG 369 in support of its argument that there had been no diminution in the value of the reversion because the subtenant was entitled to renew the sublease and could not, when renewing, invoke its own failure to comply with its repairing obligations to reduce the rent.
The Court of Appeal upheld the county court decision in favour of the tenant, but noted that the question of whether there is damage to the reversion will turn on the evidence; the position may have been different had the subtenant been unable to meet the cost of the repairs.
The Court of Appeal also upheld the county court judge’s finding of fact that the collateral agreement in favour of the subtenant had not had any detrimental effect on the value of the landlord’s reversion. The collateral agreement resulted from a personal arrangement between the subtenant and the tenant’s parent company. It did not affect the landlord’s rights under the sublease, and did not reflect adversely on the subtenant’s willingness or ability to comply with the full repairing covenants in the sublease.
It seems, however, that the landlord had accepted a surrender of the sublease (which may have affected its ability to claim damages from the subtenant). Landlords should therefore take special care when dealing with subtenants that have security of tenure under the 1954 Act.
Allyson Colby is a property law consultant
