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Ending a Headlease Where There is a Sublease in Place

There are many ways in which a lease may come to an end, examples of which are as follows:

• an order of the court;
• determination by notice;
• disclaimer;
• effluxion of time;
• forfeiture;
• frustration;
• merger;
• surrender by deed; and
• surrender by operation of law
To understand the effect of surrender of headlease on sublease, we must first discuss the most common methods of bringing a commercial lease to an end (save for forfeiture due to the tenant’s non-payment of rent or breach of some other covenant in the lease), surrender by deed and determination by notice.
Surrender by deed is where the landlord and tenant agree between themselves to bring the lease to an end before the expiry of the contractual term.  Determination by notice can be used where the lease actually contains a break clause which will allow either one or both parties to bring the lease to an end before the expiry of the contractual term.
In both cases, the landlord and the tenant will need to understand the effect of the surrender of a head lease on any sublease in place.
Surrender by Deed
A surrender by deed does not automatically terminate the sublease, instead the subtenant becomes the direct tenant of the landlord in accordance with section 139 (effect of extinguishment of reversion) of the Law of Property Act 1925.
Determination by Notice
Case law [Pennell v Payne (1995)] suggests that when a break notice is served by either a landlord or tenant, any sublease in place will end automatically and the landlord will be entitled to possession of the commercial unit.  To avoid this, if the headlease contains a break clause, any sublease to be granted in the future should always expire before the break option can be implemented or allow for early determination.
The ultimate point is, is that where the lease is being brought to an end via a pre-contracted right (the break clause), any sublease should not be able to survive something that was agreed between the parties prior to its existence.
Therefore, if the parties wish for the sublease to remain in place, the headlease should be brought to an end by way of surrender by deed.
Please remember that legal advice should be sought when entering into a lease, sublease or serving a break notice.
For any further advice, please do not hesitate to contact any one of our Legal 500 Commercial Property Team, 0800 088 6004.