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Validity of section 26 request where landlord exercised break right (High Court)

Practical Law UK Legal Update Case Report w-005-6576 (Approx. 5 pages)

Validity of section 26 request where landlord exercised break right (High Court)

by Practical Law Property Litigation
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In Fast Drinks Ltd v Cetyl International Group Inc [2016] EWHC 3501 (QB), the High Court considered what was the earliest date on which a renewal lease could commence, where the landlord had exercised a break right to terminate the headlease. The transcript has only recently become publicly available.
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The High Court considered what was the earliest date on which a renewal lease could commence, where the landlord had exercised a break right to terminate the headlease. This was relevant to whether a sub-undertenant (F) had served a valid notice requesting a new lease under section 26 of the Landlord and Tenant Act 1954 (LTA 1954).
F's sub-underlease was for a term ending on 15 January 2016 and it was not contracted out of the LTA 1954. The landlord (C) exercised a break right in the headlease which was effective on 17 July 2014. F's sub-underlease continued by virtue of the LTA 1954.
On 14 July 2014, F served a request for a new tenancy on C specifying 1 July 2015 as the commencement date of the new tenancy.
C claimed that the section 26 request was invalid; they argued that the effect of the proviso to section 26(2) was that the new renewal lease could not commence until 16 January 2016 (when F's existing lease would have expired if C had not exercised their break right).
The court considered the effect of the proviso to section 26(2) and rejected C's argument. Where a landlord exercised a break right and the tenant wished to request a new tenancy, the renewal lease could commence before the original expiry date. In this case the proviso did not apply and the section 26 request was valid. (Fast Drinks Ltd v Cetyl International Group Inc [2016] EWHC 3501 (QB).)

Background

Landlords' break clauses

If a business lease has been contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954 (LTA 1954), the landlord's break notice will end the lease in accordance with its terms. The landlord only has to serve the break notice to bring the lease to an end.
If the lease has not been contracted out, the landlord's break notice will end the contractual lease in accordance with its terms, but a statutory tenancy under the LTA 1954 will come into effect when the contractual lease ends. The landlord will also need to serve notice on the tenant under section 25 of the LTA 1954 in order to terminate the statutory tenancy. It is therefore less common to see a landlord's break clause in a non-contracted out lease. For more information, see Practice note, Break clauses in leases: The effect of the LTA 1954 on landlords' break clauses.

Effect of a break notice on an underlease and an undertenant

If a headlease is terminated by the exercise of a break clause, then any underlease also ends.
If the underlease has not been contracted out, then although the underlease will end as a matter of contract, the undertenant would have the right to apply for a renewal lease from the head landlord (as their competent landlord). For more information, see Practice note, Break clauses in leases: Effect of a break notice on an underlease and an undertenant.

Section 26 of the Landlord and Tenant Act 1954

If a lease has not been contracted out, the tenant can request a new tenancy by serving a valid section 26 request on the competent landlord. The tenant can serve this before the end of the contractual term, or after the end of the contractual term if the tenancy is continuing under the LTA 1954.
The section 26 request must be served not more than 12 months, nor less than six months, before the proposed commencement date specified in the section 26 request (section 26(2), LTA 1954).
This is subject to the proviso (Proviso) that this 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."
For more information, including circumstances in which the tenant cannot serve a section 26 notice, see Practice note, LTA 1954: procedures for renewal of a lease: Procedures where tenant is initiating renewal.

Facts

The freeholder (C) granted a third party a headlease of the property for a term expiring on 16 January 2016. This contained a landlord's break right.
The third party granted another party a sublease of the property out of the headlease, for a term expiring on 15 January 2016.
The subtenant granted F a sub-underlease of the property for a contractual term ending on 15 January 2016. It was not contracted out of the LTA 1954.
C exercised their contractual break right in the headlease, and notified F on 28 May 2014 that it had done so. This had the effect, at common law, of terminating the headlease and all the derivative interests carved out of the headlease on 17 July 2014. However, F's sub-underlease continued by virtue of section 24 of the Landlord and Tenant Act 1954.
On 14 July 2014, F served a request for a new tenancy under section 26 on C. This specified 1 July 2015 as the date for commencement of the new tenancy.
C subsequently served a notice under section 25 of the LTA 1954 giving notice to end the tenancy on 30 March 2015 (the date on which C served the section 25 notice seems to be incorrect in the transcript, although it appears that the section 26 request pre-dated it).
On 17 April 2015, F applied to the County Court for a new tenancy but was unsuccessful as C argued that the section 26 request was invalid and that F's application was out of time. It was common ground that if the section 26 request was a valid notice, then the section 25 notice was not valid and the claim would not be out of time.
On appeal:
  • C argued that the section 26 request was invalid because, under the Proviso, the earliest commencement date that F could have specified was 16 January 2016. It was the policy of the LTA 1954 to prevent the tenant breaking their own agreement by seeking a new lease to start on a date earlier than the date upon which they agreed that the original lease would expire. The tenant had to wait until the existing lease would have expired.
  • F argued that C's section 25 notice was invalid because, prior to its service, F had already served a valid section 26 request for a new tenancy. The section 26 request was valid because the Proviso did not apply. If it were not for the LTA 1954, the tenancy would have come to an end on 17 July 2014. That termination date did not arise by effluxion of time, but rather by operation of termination of the headlease, and so the case did not fall within the Proviso.

Decision

The High Court allowed F's appeal. The court:
  • Held that there were circumstances in which the Proviso did not apply.
  • Noted that this was a novel point which had not previously been the subject of decision or consideration. That might be because this type of situation did not occur commonly.
  • Considered C's argument about the policy of the LTA 1954. It might well be that, whilst the original tenancy subsisted, it was right that the tenant could not seek a new lease to start on a date earlier than the date upon which they agreed that the original lease would expire. However, that was not necessarily the case where the original lease had been brought to an end earlier than the contractual expiry date by conduct on the part of the landlord rather than the tenant.
  • Observed that the wording "apart from this Act" in the Proviso envisaged a situation where what (at the time of the section 26 request) prevents the tenancy coming to an end by effluxion of time is the operation of the LTA 1954 (and in particular the continuation effect of section 24).
    By contrast, in the current case, what prevented the tenancy coming to an end by effluxion of time was C's prior exercise of their break right under the headlease and the consequential automatic ending of the derivative interests.
  • Held that in this case the Proviso did not apply. F's argument was correct and the section 26 request was valid.

Comment

The case helpfully clarifies when a renewal lease can commence, in a situation where the landlord exercises a break right and the tenant wishes to apply for a new lease.
As noted by the court, this situation may occur rarely. Landlords who wish to have a break clause will usually want leases (and derivative interests) to be contracted out of the LTA 1954, to ensure that they are not statutorily continued under the LTA 1954, and so that tenants cannot apply for new leases.
It is a useful reminder of the effect of landlord's break clauses on leases and any subleases. A prospective tenant should take care to ascertain whether any superior leases contain a landlord's break clause, and should be aware of the implications depending upon whether their own lease is contracted out of the LTA 1954.

Source

Fast Drinks Ltd v Cetyl International Group Inc [2016] EWHC 3501 (QB) (21 October 2016).
End of Document
Also Found In
Resource ID w-005-6576
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Published on 31-Jan-2017
Resource Type Legal update: case report
Jurisdictions
  • England
  • Wales
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