The Gunners will allow him to leave the club on a permanent basis at the end of the season.
Sheaf, who is 23 years old, has spent this campaign on loan in the Championship at Coventry City and has made 29 appearances in all competitions.
The fact that Arsenal are giving him the green light to depart is a boost to the Sky Blues’ hopes of signing him on a permanent basis. Mark Robins’ side do hold an option to purchase him when his loan expires.
Sheaf spent last season on loan in League One at Doncaster Rovers and was a key player for them under Darren Moore. He made 38 appearances for the Yorkshire side, scoring twice and chipping in with three assists.
That earned him a switch to the Championship last summer and he has since been a regular for Coventry this term.
The midfielder, whose brother Max plays for Hull City, started his career in the academy at West Ham United before switching to their London rivals as a youngster.
Sheaf has never made a senior appearance for the Gunners but also enjoyed a season on loan in League Two at Stevenage before joining Doncaster for the last campaign.
Arsenal will allow him to leave this summer and Coventry could swoop in and utilise their obligation to buy.