Land of Leather said Sleep Depot, which operates concessions out of the company's stores, has gone into administration.
The sofa retailer has warned the loss of annual rent from Sleep Depot will cost the company £1.6 million over the rest of the year, although some of this can be reclaimed by trading from the vacated space.
Sleep Depot paid Land of Leather £4.8 million in annual rent but was struggling, according to Land of Leather.
In a statement, Land of Leather said: "Sleep Depot, which operates 71 concessions within Land of Leather stores, was in the process of finalising a financial restructuring due to the very challenging market conditions.
"Land of Leather understands that this restructuring has failed and that application has been made to put Sleep Depot into administration."
The retailer added that the space left by Sleep Depot would not result in a reduction in profitability in the longer term.
Last week, Land of Leather said pre-tax profit for the six months to January 27th 2008 was down to £5.55 million from £5.80 million last year.
The specialist sofa retailer blamed a disappointing January sale for the decline and a drop in consumer confidence.