Written By Shahrose Javed, Meg Tweedlie and Michelle Yung
In the world of commercial leasing, the relationship between landlords and tenants and, by extension, subtenants, is at the heart of the leasing arrangement. But what happens when arrangements change and relationships shift? Particularly that between the landlord and tenant—what is the impact on the subtenant? For instance, if a head lease ceases to exist, what becomes of the sublease?
One might reasonably conclude that a sublease cannot exist without a head lease. Yet this is not necessarily the case. Understanding why is critical in determining the rights and obligations of the parties when a head lease comes to an end.
An Important Distinction: Surrender vs Termination
As a starting point, the distinction between a surrender of lease and a termination of lease is noteworthy. While they are both the means to the same or similar end, the distinction is critical when determining the outcome for a sublease.
Toronto Harbour Commissioners v T.H.C. Parking Inc.1 helpfully lays out the difference between a termination of lease and a surrender of lease, by highlighting the impact on a sublease in the case of termination. Relying on Kerr v. Capital Grocery Ltd.2, the court described a surrender of lease as a voluntary surrender by mutual agreement between lessor and lessee. Whereas terminations are unilaterally imposed by a party, particularly in the case of default, surrenders by contrast require mutual agreement. The court, in its analysis, concluded that the termination of a head lease results in the termination of the sublease.
On that basis, Toronto Harbour Commissioners naturally raises the question: if the termination of a head lease results in the termination of the sublease, what is the outcome when the head lease is surrendered? The answer is, it depends.
Firstly, the fate of a sublease upon the surrender of a head lease largely depends on the terms of the head lease. If the head lease specifically addresses the impact of a surrender on any sublease, it can clearly state whether the subtenant’s rights will be affected or if the sublease will continue. However, if the head lease is silent, the effect of surrender of the head lease must be further considered.
The Law
At common law, the surrender of the head lease results in the landlord becoming bound by any existing sublease. In Shapiro v Handelman3, the court states that a surrender ends the interest between the parties but does not affect third parties with existing rights, preserving the original interest as needed to protect those rights.
In many provinces including Ontario and British Columbia, the common law has been codified by statute. Section 17 of Ontario's Commercial Tenancies Act4 (the CTA) states that if the head lease is surrendered, the tenant's interest is extinguished, but this does not automatically affect the validity of any sublease. Instead, the subtenant's rights remain intact, and the sublease continues, unless the head lease explicitly stipulates otherwise. This provision was solidified in Smiles First Corporation v 2377087 Ontario Ltd.5, where the court ruled in favor of the subtenant, finding that the surrender of the head lease did not automatically terminate the sublease, in accordance with Section 17 of the CTA, and that the subtenant was entitled to remain in possession of the subleased premises, on the terms and conditions set out in that sublease, until the end of the agreed term.
The legislation in British Columbia is similar to that of Ontario. Section 38 of British Columbia's Property Law Act6 (the PLA) states that if the landlord’s interest in the property is surrendered or merged, the sublease between the tenant and subtenant remains valid. Again, this understanding has been affirmed by the jurisprudence, where the court in BC Retail Partners (Boitanio Mall) Ltd. v Overwaitea Food Group7, discussed Section 38 of the PLA and found that when a head lease is surrendered, the head lease itself merges with the freehold and disappears.
In addition to Ontario and British Columbia, this rule has been similarly codified in Yukon, Saskatchewan, Manitoba, New Brunswick, Prince Edward Island, Northwest Territories and Nunavut. However, several provinces, such as Alberta, have yet to follow suit.
Takeaways
Understanding the distinction between a surrender or termination of a head lease is crucial for landlords, tenants, and subtenants as the circumstances surrounding the end of a lease can have significantly disparate implications for the sublease. In the case of surrender, where the lease may not be automatically terminated, it is important for each party to understand its rights, taking into consideration the provisions of the head lease and the specific legislative landscape, which may afford certain rights or require additional contractual protections.
If you have any questions about how these end of term implications may affect your lease or sublease agreements, please contact the authors.
1 Toronto Harbour Commissioners v T.H.C. Parking Inc. [1999] O.J. No. 2265, para 29-32.
2 Kerr v Capital Grocery Ltd. [1921] 1 W.W.R. 1221, para 16.
3 Shapiro v Handelman. [1947] 2 D.L.R. 492, para 6.
4 Commercial Tenancies Act, R.S.O. 1990, c. L.7, Section 17.
5 Smiles First Corporation v 2377087 Ontario Ltd.(International Union of Painters). 2018 ONCA 524, para 28.
6 Property Law Act, R.S.B.C. 1996, c. 377, Section 38.
7 BC Retail Partners (Boitanio Mall) Ltd. v Overwaitea Food Group. 2017 BCSC 1491, para 90.
Please note that this publication presents an overview of notable legal trends and related updates. It is intended for informational purposes and not as a replacement for detailed legal advice. If you need guidance tailored to your specific circumstances, please contact one of the authors to explore how we can help you navigate your legal needs.
For permission to republish this or any other publication, contact Amrita Kochhar at kochhara@bennettjones.com.
Bennett Jones