Landlords need to ensure the terms of any underleases or sub-underleases are controlled

The recent High Court decision in Fast Drinks Ltd v Cetyl International Group Inc is a timely reminder for landlords to ensure tenants can only sub-let on underleases that are contracted out of the Landlord and Tenant Act 1954 (“the Act”) if they require full control over the ownership chain of a property.

The facts of Fast Drinks Limited v Cetyl International Group Inc (2016)

Cetyl International Group Inc (“the Landlord”) granted a lease for a term expiring on 16 January 2016 (“the “Headlease”). The Headlease contained an option for the Landlord to determine the Headlease. A subsequent underlease and sub-underlease were granted which expired prior to the Headlease on 15 January 2016. The Landlord exercised its option to determine, terminating the headlease, underlease and sub-underlease on 17 July 2014.

The sub-underlease benefitted from security of tenure under the Act and on 14 July 2014, Fast Drinks Ltd (“the Sub-undertenant”) served a section 26 request for a new tenancy. The section 26 request specified 1 July 2015 as the commencement date for the new tenancy.

The Landlord argued the Sub-undertenant’s section 26 request was invalid and served a section 25 notice on the Sub-undertenant opposing the grant of a renewal tenancy giving notice to end the tenancy on 30 March 2015.

The County Court decision

The Sub-undertenant was not successful in the application for a new tenancy. The County Court Judge agreed with the Landlord and held that the section 26 request was not valid, as it specified an invalid commencement date for the renewal tenancy. The Court found the earliest date the renewal tenancy could have commenced was 16 January 2016.

The Court held the Landlord’s section 25 notice was valid. As the Sub-undertenant did not apply for a renewal tenancy before the termination date specified in the section 25 notice, it lost its right to a renewal tenancy under the Act.

Fast Drinks Ltd appealed to the High Court.

The High Court appeal decision

The issue that the High Court had to consider was whether the Sub-undertenant could validly serve a request for a new tenancy specifying 1 July 2015 as the date for the commencement of the new tenancy, despite the sub-underlease contractually determining on 15 January 2016, but for the break notice served.

The Sub-undertenant argued that the operation of the break clause meant that the tenancy could not expire on the term expiry date, but would have come to an end on the break date, which was 17 July 2014. As a result, it was possible to make a request for a new tenancy commencing on 1 July 2015.

The High Court agreed, allowing the appeal and held that whilst a section 26 request cannot be used to allow a tenant to bring a lease to an end prior to its contractual determination date, this does not apply where the lease has already been brought to an end early by the Landlord. The High Court stated that:

“In the present case the appellant could have served a section 26 request specifying 16 January 2016 as the start date, i.e. the day after the original contractual expiry date, but … it could not have done this until 16 or 17 January 2015 at the earliest. By that time … it would have been too late because the respondent had served its section 25 notice by then and the appellant would have been deprived of the opportunity of seeking a new tenancy.”

Commentary

This case highlights that a landlord needs to ensure the terms of any underleases or sub-underleases are controlled. This is especially important where a landlord has the benefit of a break clause, which would allow earlier recovery of possession of a property.

For further information, please contact the Real Estate Disputes Team at Hamlins.