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Fast Drinks Ltd v Cetyl International Group Inc [2016] EWHC 3501 (QB)

The High Court has considered a novel point about the effect on an undertenant with security of tenure of a landlord exercising a break option to determine a headlease, and the earliest commencement date that can be included in a section 26 request under the Landlord & Tenant Act 1954.

Background

On 5 February 2011 Cetyl International Group Inc (CIG) granted a headlease of the property to a James Cartwright (Tenant) for a term expiring on 16 January 2016. The headlease also contained a landlord break option.

On 9 May 2011, the Tenant granted an underlease of the property to Urban Enterprises Ltd (Undertenant) for a term expiring on 15 January 2016.

On 16 May 2011, the Undertenant granted a sub-underlease of the property to Fast Drinks Ltd (Fast Drinks) for a term also expiring on 15 January 2016. That sub-underlease was not contracted out of the security of business tenure provisions contained in Part II of the Landlord and Tenant Act 1954 (“1954 Act”) and therefore, Fast Drinks had a statutory right to remain in occupation of the property after the contractual expiry date of the sub-underlease.

CIG exercised the break option contained in the headlease, terminating the headlease on 17 July 2014. On 28 May 2014, CIG notified Fast Drinks that it had exercised the break option in the headlease. However, Fast Drinks’ tenancy continued pursuant to the statutory protection provided by section 24 of 1954 Act.

Two months later, on 14 July 2014, Fast Drinks served a section 26 request on CIG, requesting a new tenancy with a start date of 1 July 2015.

The issue on appeal was whether a sub-undertenant could validly serve a section 26 request specifying 1 July 2015 as the date for the commencement of the new tenancy, where the contractual expiry date of the existing sub-underlease was not until 15 January 2016.

CIG argued that the section 26 notice was invalid because of the proviso in section 26(2) of the 1954 Act, which (CIG argued) meant that the commencement date in a section 26 request could not be earlier than the date that the sub-underlease would come to end by effluxion of time or a notice to quit, so the earliest commencement date Fast Drinks could include on a section 26 request was the day after the expiry of the contractual term date of the sub-underlease – 16 January 2016.

The case answered a question about the 1954 Act that had not been considered by the Courts before.

The Law

The general common law principle is that when a lease comes to an end any underlease will also automatically terminate. However, the tenancy created by an underlease will continue against the landlord if the underlease has security of tenure under the 1954 Act.

Section 26(2) of the 1954 Act provides:

“A tenant’s request for a new tenancy shall be for a tenancy beginning with such date, not more than 12 nor less than 6 months after the making of the request, as may be specified therein: Provided that the said date shall not be earlier than the date on which apart from this Act the current tenancy would come to an end by effluxion of time or could be brought to an end by notice to quit given by the tenant.”

This proviso means, that in order to be a valid section 26 request, the date specified as the start date for the new lease must not be earlier than the date on which apart from the 1954 Act, the current lease would come to an end or could be brought to an end.

The Court’s Decision

The High Court held that a section 26 request that specified a commencement date which was before the contractual expiry date of a sub-underlease could be valid in certain circumstances. This case fell in to those circumstances because CIG had exercised its break option to determine the headlease, so the second proviso in the 1954 Act did not apply.

In this case, the determination of the headlease created an unusual situation. If the 1954 Act did not apply to the sub-underlease, then the sub-underlease would have automatically determined on 17 July 2014, as a result of the termination of the headlease rather than by effluxion of time. Therefore, the court held that the proviso in section 26(2) of the 1954 Act did not apply and Fast Drinks’ section 26 request could validly request a new lease to commence on a date prior to the contractual expiry of the sub-underlease.

Practice points

The case is a warning to landlords with a break option that a validly exercised break will only end the contractual term of the lease or any underlease, unless they are contracted out of the 1954 Act. Therefore, landlords will want to ensure that any underleases are contracted out of the 1954 Act.

Tenants and undertenants will need to review any superior leases for break clauses that could cut short the tenant’s tenancy. Tenants should consider the effects and timings of break options and the implications of accepting a lease that does not have security of tenure.

Published: 25 March 2017

Spring 2017

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Term date drama: the effect of break options on undertenants

Background

The Law

The Court’s Decision

Practice points

For general enquiries

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Term date drama: the effect of break options on undertenants

Background

The Law

The Court’s Decision

Practice points

For general enquiries

About Irwin Mitchell

Contact Us

Get a call back