When the owner of the property or the landlord creates a lease in favour of a tenant, he creates the ‘grant’ of that lease. This is known as the head-lease because the only better title above this is the freehold title. Just as the landlord was able to create a lease for himself over the property, the new assignee can also create a lease thereby creating a sub-lease.
If this takes place, the property would have three estates over the same land; freehold, leasehold and sub-leasehold. Thus one party can lease its freehold property to another tenant, who can again give it on sub-lease. To distinguish between freehold transfer and leasehold transfer, transfer of leasehold is often referred as assignment.
It is important to differentiate between grant and assignment as they are both distinct and separate. While ‘grant’ creates the lease for the very first time, an assignment refers to the transferring of the remainder of the lease once it has already been created.
There are two points that are to be considered. First, when a sub-lease is granted (by a tenant) the terms of the sub-lease should be for a period that is shorter than the head lease. When the lease period is for a term equal to or greater than the head-lease the transaction is treated as an assignment of the tenant’s lease. Secondly, the original lease should not place a restriction on the tenant’s freedom to assign or sub-let. Usually, it is common practice to place restrictions on the tenant’s freedom to assign. It is advisable to check the terms of a lease at an early stage of a transaction.
Photo courtesy: Richard Hsu