A recent case has reminded landlords of the need to ensure that every lease is contracted out of the Landlord and Tenant Act 1954 if they require complete control over the chain of ownership of a property.
In Fast Drinks Limited v Cetyl International Group Inc, a sub-underlease had not been contracted out of the security of tenure provisions of the 1954 Act. As a result, when a contractual break right in the head lease was exercised, it terminated all derivative leases, but the sub-undertenant retained a statutory right to apply for a new tenancy under the 1954 Act.
Why is the case significant?
It answered a question about the 1954 Act that has not been considered before.
Where a lease is within the 1954 Act, the tenant can serve a section 26 request for a new tenancy either before, or after, the end of the contractual term.
However, the request must be served not more than 12 months, and not less than 6 months, before the proposed term commencement date for the new lease. The term commencement date cannot be earlier than the date on which the term is due to end, or could be terminated by a tenant's break clause. This stops a tenant using the 1954 Act procedure to bring a lease to an end early.
It is critical for the tenant to include a valid term commencement date in the section 26 request, and to ensure that the request is served within the correct timeframe of this date.
The question for the court was, where a landlord's break clause has been exercised, what is the earliest valid term commencement date for the renewal tenancy - the break date or the date on which the tenancy would have expired if the break had not been exercised?
The facts of the case
The landlord granted the headlease for a term expiring on 16 January 2016. The headlease contained a landlord's break right. An underlease, and sub-underlease followed, both expiring on 15 January 2016.
The landlord had exercised the break clause in May 2014, which terminated the head lease, underlease, and sub-underlease on 17 July 2014. The sub-underlease benefitted from security of tenure under the 1954 Act and the sub-undertenant served a section 26 request for a new tenancy on the landlord on 14 July 2014, specifying 1 July 2015 as the commencement date for the new tenancy.
The landlord subsequently served a section 25 notice on the sub-undertenant giving notice to end the tenancy on 30 March 2015.
At first instance, the sub-undertenant unsuccessfully applied to the court for a new tenancy. The county court judge accepted the landlord's argument that the section 26 request was invalid, on the basis that the earliest commencement date for a new tenancy was 16 January 2016, the date on which the sub-underlease would have expired if the break clause had not been exercised.
Because the section 26 request was invalid, the section 25 notice was valid, and as the tenant had not applied for a new tenancy before the termination date specified in the section 25 notice, it lost its statutory right to a new tenancy.
The sub-undertenant appealed to the High Court. It argued that the section 26 request with a term commencement date of 1 July 2015 was valid. Without the statutory rights granted by the 1954 Act, the sub-underlease would have come to an end on the break date - 17 July 2014. The operation of the break clause meant that the sub-underlease could no longer expire on the term expiry date. Therefore, it was possible to make a request for a new tenancy starting on 1 July 2015.
The High Court's decision and its implications
The appeal court agreed with the sub-undertenant. The section 26 request was valid, and therefore the landlord's section 25 notice had no effect. Although the proviso to section 26 is designed to ensure that a tenant cannot bring a lease to an end early by applying for a new lease, this does not apply where the original lease had been brought to an end earlier than the term expiry date by the landlord's actions.
The case had unusual facts in that it is normally a condition of landlord's consent to underletting that any underlease is contracted out of the 1954 Act, and so all underleases and sub-underleases would simply fall away if a break clause is operated further up the chain.
It demonstrates that a landlord needs to ensure that the terms of derivative leases are tightly controlled, particularly where the landlord wishes to have the benefit of a break clause to recover possession of the property.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.