Breaking bad

The scenario is a familiar one. A freeholder grants a head lease, the head lessee grants an underlease, the underlessee grants a sub-underlease. What happens when the head lease is terminated?

At common law, all sub-interests derived from the head lessee’s interest are also terminated. The branch falls with the tree. What about where the Landlord and Tenant Act 1954 applies to the sub-underlease? The question arises as to when that tenancy comes to an end for the purposes of section 26 of the Act: when the term of the head lease is brought to an end or on the original contractual term date of that lease?

Business tenants are entitled to make a request for a new tenancy under section 26(2) of the 1954 Act. The request for a new tenancy must be for a tenancy beginning with a date not more than 12 nor less than six months after the making of the request. This is subject to a proviso that the date cannot 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’.

Start date

In Fast Drinks Ltd v Cetyl International Group Inc [2016] EWHC 3501 the High Court considered a previously undecided point of construction of section 26 of the Act. The appellant, Fast Drinks, was the lessee in occupation of certain premises pursuant to the terms of a sub-underlease which expired on 15 January 2016. The freeholder, Cetyl International, exercised a break clause terminating the head lease with effect from 17 July 2014. At common law this had the effect of terminating the appellant’s interest. However, the tenancy continued under section 24 of the Act. Three days before the end of the head lease, the appellant served a section 26 notice requesting a new tenancy commencing on 1 July 2015 (a date which was not more than 12 nor less than six months after the making of the request). The respondent challenged the appellant’s request on the grounds that the section 26 notice was invalid.

The respondent argued that ‘the date on which, apart from th[e] Act, the current tenancy would come to an end by effluxion of time’ was the contractual term date of 15 January 2016. It was argued that the date required by the section 26(2) proviso was the date on which the tenancy would end under the current terms of the tenancy agreement and as a consequence of the break. The termination of the head lease at common law was to be ignored as this did not bring the tenancy to an end by effluxion of time.

The appellant argued that, but for the Act, its tenancy would have come to an end under common law on the date of termination of the superior lease. As such, the sub-underlease could never end by effluxion of time and the proviso in section 26 did not apply. This argument was accepted by Mr Justice Morris, who, in allowing the appeal, held that the proviso did not operate in all situations.

Landlord’s conduct

Section 26(2) requires the start date of the new tenancy to be a date after the date of the notice itself. In circumstances where the contractual term of the protected tenancy had come to an end but the tenancy continued by virtue of section 24, there was no need for the proviso to operate when a section 26 notice was given. In that situation, the specified start date of the new tenancy could never be earlier than the effluxion date and the proviso would never bite.

The respondent sought to take advantage of the position in which its early termination of the head lease had placed the appellant. It sought to create a situation whereby the sub-undertenant could only give notice under section 26 before the end date of the head lease, which would be too early to be able to specify a start date for the new tenancy which met the requirements of the proviso in section 26(2) of the Act. That would mean that by serving the break notice the respondent could deprive the appellant of the ability to make a section 26 request for a new tenancy.

While it seems right that a lessee should not be permitted to seek a new tenancy commencing on a date earlier than that upon which was contractually agreed, this should not necessarily follow in cases where the tenancy has been brought to an end earlier than the contractual expiry date by conduct on the part of the landlord.

Greville Healey, pictured, and Tricia Hemans are barristers at Falcon Chambers

@FalconChambers1 www.falcon-chambers.com