Sublessee's options if headlease is cancelled

Each week, national law firm Simpson Grierson answers commercial property questions, which can be emailed and headed "property problems". This week's question is answered by senior associate Daniel Kelleher and associate Davina Lal who can be contacted at daniel.kelleher@simpsongrierson.com and davina.lal@simpsongrierson.com

Q. I operate a small family business from a shop I sublease from another company. That company leases the shop from the owner.

I have recently heard rumours the company has not been paying rent to the owner. Can the owner cancel the lease with the company at any time? If it does cancel the lease, does that bring my sublease to an end?

I am concerned as this would be devastating for my business. I have heard if the term of my sublease with the company is longer than the term of the company's lease with the owner, I can argue there has been an assignment of company's lease to me. What are my options here?

A. In this answer we will refer to the lease between the company and the owner of the property as the headlease. If the company has not been paying rent to the owner of the shop then you are right to worry. The owner has the right to cancel the headlease due to the non-payment of the rent. Any valid cancellation of the headlease would bring your sublease to an end as your sublease only exists by virtue of the headlease.

However, the owner can only cancel the headlease if it complies with certain notice provisions. For instance, the rent must be in arrears for 10 working days before the owner can issue a notice of intention to cancel the lease.

The owner must also give the company no less than 10 working days after service of the first notice to pay the arrears in rent. This assumes there have been no other breaches of the lease. Most importantly to you is the owner must serve the notice or a copy of the notice on you, the sublessee, if your name and address is known to the owner. This will give you notice of the owner's intention to cancel the lease. You are correct in relation to a sublease being treated as an assignment in some circumstances. If the term of your sublease exceeds the term of the headlease then, whether it operates as an assignment depends on whether the sublease was entered into prior to or after January 1, 2008. This is when the Property Law Act 2007 came into force. Assuming your sublease was entered into after that date, your sublease will not operate as an assignment unless the document itself says otherwise. Instead, the term of your sublease will be reduced to expire at the same time as the headlease.

However, if your sublease was entered into prior to January 1, 2008 then the sublease will operate as an assignment. As the assignee, you will become the direct tenant of the owner and this would allow you to take steps to remedy the breach of the headlease and prevent cancellation of the lease.

Your other option as sublessee is to apply to the court for relief under section 258 of the act. This section only applies where the headlease has been validly cancelled. You can only apply under the section if the headlease has not been reinstated by a successful application by the company and if no more than three months has lapsed after the date on which the owner re-entered the shop.

By making this application, you would basically be asking the court to order the owner to enter into a lease directly with you. This would put you in the position of the tenant of the headlease for the remainder of your sublease term. Any new lease term would begin on a date no later than the date on which the cancellation of the lease took effect. It would expire no later than the date on which the original sublease would have expired. But what must be remembered is the courts have a wide discretion when determining whether to grant a sublessee relief and many factors will be considered before any form of relief is granted.

The information contained in Commercial Property is intended to provide general information in summary form current at the time of printing. The contents do not constitute legal advice and should not be relied on as such. Specialist advice should be sought in particular matters.