The following notes and the drafting of this template take into account changes made by the Charities Act 2022 which came into effect on 14 June 2023 and 7 March 2024.

When to use this Underlease Template 

This Underlease should be used by a Charity (Landlord) which has a lease of office premises from a Superior Landlord and which wishes to underlet part of those premises to another person or organisation (“Tenant”) for a term of five years or less. The Tenant under this Underlease reimburses a specified proportion of the service charge and insurance rent paid by the Landlord to the Superior Landlord under the Superior Lease. There are no rent review provisions. The Tenant’s right to security of tenure is excluded. Assignment of the whole of the Lease is permitted but underletting is prohibited. There are optional break clauses.

Landlord’s Superior Lease

This Underlease has been drafted on the assumption that the Superior Landlord owns a Building, the Landlord (Charity) has a lease (the Superior Lease) of part of that Building (e.g. a floor) and this Lease is of part of the Landlord’s demise (e.g. part of the floor). Most of the services will be provided by the Superior Landlord and charged to the Landlord by way of a service charge. The Landlord recovers a specified proportion of the Service Charge from the Tenant under this Lease. If the Landlord is providing any services itself (e.g. facilities for the floor) it can recover a fair proportion of the cost from the Tenant under Clause 3.1.32.

Care needs to be taken to ensure that this Lease is consistent with the Landlord’s Superior Lease. For example, the term should be no longer than the term of the Superior Lease. If there is a break clause in the Superior Lease, a similar break clause should appear in this Lease. The requirement to decorate the Premises (Clause 3.1.8) should arise at the same time as in the Superior Lease. If the Superior Landlord requires any underlease to have rent reviews at the same time as the Superior Lease you should seek legal advice and not use this Underlease since it does not include rent review provisions. 

Land Registry Prescribed Clauses

This Lease has Land Registry Prescribed Clauses at the beginning. These are not strictly necessary for a lease with a term of less than 7 years but they are included as they helpfully record the main terms.

Prescribed Clause LR3 provides alternative wordings for the description and details of the Charity Landlord. The alternatives cover all of the more common legal forms of charity, i.e. CIO, Charitable Company Limited by Guarantee, Charitable Trust, and Charitable Unincorporated Association.

Prescribed Clause LR3 also includes a field for an optional Guarantor. If there is no Guarantor, this field can be left blank and Clause 10 (Guarantor’s covenant) should be deleted.

Prescribed Clause LR4 makes optional reference to a plan. It is strongly recommended that a plan is included so that the extent of the property is clear. The plan should as a minimum show with red edging the property that is being leased to the Tenant. The plan may also need to show the Common Parts (a defined term in the Lease) and the areas over which rights are granted to the Tenant in the First Schedule to the Lease if these areas cannot be adequately described in words.

Details of other Clauses

In Clause 1 (definitions) there is reference to the Building, the Common Parts, the Landlord’s Neighbouring Property, a Letting Unit, the Premises and the Retained Property. These terms describe the following areas:

• Building – the building in which the Premises are situated
• Common Parts – the parts of the Building which are not let to any tenants and which all tenants have the right to use (e.g. corridors, toilets)
• Landlord’s Neighbouring Property – property owned by the Superior Landlord adjoining or near the Building
• Letting Unit – a unit of accommodation within the Building that is designed to be let to a tenant
• Premises – the property that is let to the Tenant under the Underlease. The Tenant is given an “internal demise” which means that the Tenant is responsible for the plaster on the walls but not any structural parts of the Building
• Retained Property – the parts of the Building that are retained by the Superior Landlord. This includes the Common Parts, any conduits and the structure of the Building.

In Clause 2 the Landlord (Charity) grants the Underlease to the Tenant. The Tenant must pay the Rent and a specified proportion of the insurance rent and service charge paid by the Landlord to the Superior Landlord.

Clause 3 contains the Tenant’s covenants. These cover matters such as payment of utilities charges, repair, decoration, safety, the Landlord’s rights of entry, use, alterations, alienation (assignment and underletting), indemnity and payment of Landlord’s costs.

Clause 4 contains the Landlord’s covenants. These cover quiet enjoyment (the Tenant’s right to use the Premises without interference from the Landlord) and the enforcement by the Landlord of the Superior Landlord’s covenants in the Superior Lease.

Clause 5 contains various standard lease clauses including forfeiture and suspension of rent if the Premises are damaged so as to be unfit for use.

Clause 6 deals with service of notices by the Landlord and Tenant.

Clauses 7 and 8 contain optional break clauses (termination rights) for the Landlord and Tenant. These clauses should be amended or deleted as appropriate and the break dates should tie in with any break clauses in the Superior Lease. The Tenant’s break option is conditional on rent have been paid up to date, the tenant giving up possession of the Premises (i.e. vacating) and the tenant not leaving any underleases in place. If these conditions are not satisfied, the Tenant’s break will not be effective and the Underlease will continue. If the Tenant is in breach of other terms of the Underlease, e.g. necessary repairs have not been carried out, the break will be effective but the Landlord will retain the right to sue the Tenant for any breaches of the Underlease.

Clause 9 deals with exclusion of security of tenure. Reference should be made to the Guidance on Excluding Security of Tenure and the associated forms.

Charities Act

Clause 11 contains wording applicable (under the Charities Act 2011) where a lease is granted by a charity which is a “non-exempt” charity. The Charity will need to select and amend the wording in this Clause, and as necessary you will need to take legal advice about that wording. Most charities are “non-exempt” but if you are not sure, you will need to take advice as to whether it is either “non-exempt” or “exempt”. If it is “exempt” you will then also need to take advice as to the appropriate clause to be included instead of the one in this Clause.

Schedules

The First Schedule sets out the rights that the Tenant has to use other property. These rights should be checked carefully and amended to suit the circumstances and be consistent with the Superior Lease.

The Second Schedule sets out the rights that the Landlord has in respect of the Premises, including rights of entry and the right to carry out work to neighbouring property. If any additional rights are required they should be added to the Second Schedule.

The Third Schedule has a set of regulations the Tenant must comply with. Under Clause 3.1.31 the Landlord and the Superior Landlord have the right to make further regulations from time to time for the better management and control of the Building.

Execution

The underlease must be executed as a deed. Various types of execution clauses for the Charity Landlord and the Tenant are included, and the parties should choose the appropriate clauses. The Charity Landlord execution Clauses differ from each other to take account of how each legal form of charity must/may execute a deed.

Optional phrases / clauses are enclosed in square brackets. These should be read carefully and selected so as to be compatible with one another. Unused options should be removed from the document.

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