Changing landscape for long leases
21 September 2021 by Joe Metcalfe
Commercial Property: What happens to a Sublease when a Headlease comes to an end?
There are various methods that may be employed to bring a commercial or business lease to an end. I am going to outline some of the most common methods, including looking at them in the context of the termination of a headlease, and what effects they may have on a sublease.
Ending a Lease by Notice
If a lease contains a landlord, tenant or mutual option to break, the respective party can end the lease before the expiry of the contractual term by serving a notice on the other party, as per the terms contained within the break clause.
When a headlease is brought to an end by notice, a sublease will automatically come to an end and the superior landlord will be entitled to the premises being returned with vacant possession.
When a person becomes bankrupt or a company becomes insolvent, either a trustee in bankruptcy or a liquidator may disclaim certain onerous property liabilities, including bringing a lease to an end – this is known as disclaiming a lease.
If a headlease is disclaimed in this way, the subtenant retains the right to remain in occupation for the remainder of the term of the sublease providing that the subtenant complies with the covenants of the headlease, including payment of the full headlease rent.
Effluxion of Time
A lease will always be granted for a determinable period of time and it will automatically end once the contractual term expires, providing that it is excluded from security of tenure.
A sublease cannot be granted for a contractual term longer than a headlease term. This is why an underlease must be granted for at least one day less than a headlease, meaning that it will terminate before the headlease.
A landlord may be able to forfeit a lease due to non-payment of rent or due to a breach of other tenant covenant if the lease contains provisions for re-entry and forfeiture. The landlord may forfeit of a lease by taking back the premises (known as peaceable re-entry) or by taking court proceedings.
In the event of a forfeiture of a headlease, all interests deriving from it will come to an end, which includes any subleases. However, a tenant under a sublease is able to apply to the court for relief from forfeiture, even if the sublease was granted in breach of covenant. If the court were to grant them such relief, they could remain in occupation for the term of the sublease.
Surrender by Deed
A surrender by deed is where the landlord and tenant come to an agreement between themselves to bring the lease to an end before the contractual term expires.
Where a headlease is surrendered, a sublease is not automatically terminated. Instead, the tenant under the sublease becomes the direct tenant of the superior landlord and remains in occupation. This is the case even if the sublease was granted in breach of covenant, which is why superior landlords who find themselves in this position should seek legal advice before agreeing to the surrender of a headlease.
If you are a business owner, tenant or landlord and require some help with a commercial property, please do get in touch with our commercial property team on 01206 835316 or email [email protected].
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