Ordinarily derivative leases are contracted out of the security of tenure provisions in the Landlord and Tenant Act 1954. David Manda considers an unusual case in which a headlease was terminated by a contractual break, but a sub-undertenant retained a statutory continuation tenancy and a right to request a renewal lease.
Facts
The sub-undertenant, Fast Drinks, served request for a new tenancy on its competent landlord and the freeholder, Cetyl, on 14 July 2014 pursuant to section 26 of the Landlord and Tenant Act 1954 (LTA 1954) [1]. The section 26 request was dated 12 July 2014. The date specified as the date for the commencement of the new tenancy was 1 July 2015.
Cetyl’s headlease lease terminated on 17 July 2014 following exercise of a contractual break right. (Cetyl had made Fast Drinks aware of exercise of the contractual break in the headlease.)
Termination of the headlease had the effect at common law of automatically terminating all sub-interests carved out of that lease, including Fast Drinks’ contractual sub-undertenancy. However, under the 1954 Act, Fast Drinks’ statutory tenancy continued following the date of the headlease’s termination.
Was Fast Drinks’ section 26 request for a new tenancy valid?
To decide, the court had to ascertain what was the earliest start-date for a renewal tenancy that could be specified in the tenant’s section 26 request in circumstances where a landlord’s break had been exercised.
Law
Section 26(2) of Landlord and Tenant Act 1954 states:
“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.”
Argument put forward by Cetyl
Cetyl argued that, under the proviso in section 26, the request for a new tenancy was not valid because the date of commencement requested, being 1 July 2015, was prior to the date on which the relevant tenancy would have come to an end but for the provisions of LTA 1954. (The original contractual term of the sub-underlease ended on 15 January 2016. Cetyl claimed that this meant that 16 January 2016 was the earliest date on which a new tenancy could begin.)
Argument put forward by Fast Drinks
Fast Drinks countered, however, that the tenancy would have come to an end on 17 July 2014 were it not for the operation of the 1954 Act, as that was the termination date by operation of law following the break of the headlease. At common law, once a fixed-term tenancy has been terminated before the date on which it would have come to an end by the effluxion of time, that tenancy can no longer end by the effluxion of time. There is no longer any such date; section 26(2) would not apply; and so it followed that the section 26 request was valid.
Decision
The court agreed with Fast Drinks that the section 26 request was valid. The court disagreed with Cetyl’s submission that it is necessary to find an effluxion date in all cases. It held that, when considering the validity of a section 26 request, it is necessary to consider the position as at the date of the request (which, in the present case, was 14 July 2014).
The judgment states that: “…the wording, “apart from this Act” in the proviso envisaged a situation where what – at the time of the request – prevents the tenancy coming to an end by effluxion of time is the operation of the Act and in particular the continuation effect of section 24. In contrast, on the facts of the present case, what prevented the tenancy coming to an end by effluxion of time was the respondent’s prior exercise of the contractual break right under the head lease and the consequential automatic ending of the subleases.”
In cases where the contractual tenancy has expired, a section 26 request is valid if made during a continuation tenancy. In such a case, the start date would never be earlier than the effluxion date of the contractual tenancy and so the problem addressed by section 26(2) LTA 1954 would never arise. The court found that section 26(2) was there to cover the scenario where, but for the proviso, it might otherwise be possible to have a start date for the claimed new tenancy earlier than the effluxion date of the current tenancy.
There can, therefore, be circumstances where the proviso simply does not apply at all.
What can we take from the case?
The present case had unusual facts and addressed a scenario which has not been considered by the courts before. It is normally a condition of landlord’s consent to underletting that any underlease is contracted out of the 1954 Act. Where this is the case all underleases and sub-underleases would simply fall away if a break clause is operated further up the chain in a superior lease.
This case is a salutary illustration of what can happen if derivative leases are not contracted-out of the LTA 1954: landlords can find that their attempts to exercise break options to recover possession can be frustrated by the award of statutory renewal underleases.
Landlords and tenants alike should therefore ensure that they are aware, and understand the implications, of any break clauses and any security of tenure protection that may exist anywhere within a chain of leasehold interests.
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[1] The LTA 1954 confers security of tenure on tenants in occupation of premises for the purposes of their business. That means that, following termination of a contractual tenancy, a statutory tenancy and a right to request a renewal lease continue unless and until brought to an end by one of the means specifically permitted by the LTA 1954.
