Fast drinks and novel points

This was the point the High Court recently had to consider in Fast Drinks Ltd v Cetyl International Group Inc. In this case, Fast Drinks was the tenant of a property in Pennington Street, London E1 for a term expiring on 15 January 2016. A superior lease, for a term expiring on 16 January 2016, contained a break right in favour of the superior landlord of the property, Cetyl International Group Inc, and Cetyl had exercised this right, bringing the superior lease to an end on 17 July 2014. In accordance with common law principles “the branch fell with the tree” and Fast Drinks’ contractual term ended early when the superior lease was brought to an end on the break date. However, as Fast Drinks had a protected tenancy, there was a statutory continuation of their lease under the Landlord and Tenant Act 1954 (the 1954 Act).

Fast Drinks wanted to remain in occupation, and, on 14 July 2014, served a section 26 request under the 1954 Act for a new tenancy. They specified 01 July 2015 as the date for commencement of the new tenancy. It appears that Cetyl missed the opportunity to serve a counter notice opposing renewal and instead served a section 25 notice to end Fast Drinks’ tenancy on 30 March 2015. Fast Drinks applied to the Court for a new tenancy on 17 April 2015.

Under the Landlord and Tenant Act 1954 the Court cannot entertain an application for a new tenancy if it is made after the end of the statutory period. When was the end of the statutory period? Was it 01 July 2015, as per Fast Drinks’ section 26 request, or was it 30 March 2015, as per Cetyl’s section 25 notice? If the former, Fast Drinks’ application was made in time, but if the latter then Fast Drinks were out of time. Cetyl argued that, based on the wording of the 1954 Act, the earliest commencement date Fast Drinks could validly have specified in the section 26 request was 16 July 2016, when their lease would otherwise have expired through effluxion of time. Because Fast Drinks had instead specified a commencement date after the break date but before the lease was due to expire Cetyl argued that Fast Drinks’ section 26 request was invalid, Cetyl’s own section 25 notice prevailed instead, and Fast Drinks’ Court application was therefore made out of time.

The key provision

The case therefore turned on the interpretation of section 26(2) of the 1954 which states that:

“A tenant’s request for a new tenancy shall be for a tenancy beginning with such date, not more than twelve nor less than six 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.”

It was noted that the reasoning behind this proviso is to prevent the tenant seeking a new lease to start on a date earlier than the date on which it agreed the original lease would expire.

Decision

On appeal, the High Court determined that the renewal lease could commence before the original expiry date and the section 26 request was therefore valid. The Court held that the proviso in section 26(2) of the 1954 Act was there to cover the case 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. However, there are circumstances where the proviso does not apply at all, such as this case.

The Court noted the policy reasons for the proviso, however, it distinguished this case on the grounds that the lease had been brought to an end earlier than the contractual expiry date by the actions of the landlord, namely the exercise of the break right. It was noted that whilst the tenant could in theory have served a notice specifying 16 January 2016 as the start date, it could not have done so until 16/17 January 2015 at the earliest, which is impractical as the landlord could serve a section 25 notice in the meantime, as in this case.

The High Court commented that the wording “apart from this Act” in section 26(2) envisaged a situation where what prevents the tenancy coming to an end by effluxion of time is the operation of the Landlord and Tenant Act 1954. The High Court reasoned that in this case the proviso in section 26(2) was simply not applicable; what mattered here was that the lease ended earlier than it would have come to an end by effluxion of time, owing to the landlord’s action, namely the exercise of the break option and the consequential ending of the subleases granted out of it.

Comment

As highlighted by the Court, this is not a particularly common situation. Unusually, it is an issue under the 1954 Act not previously considered by the Court. If a landlord break clause has been included in a lease it is common for that lease, and any subleases to be excluded from the protection of the 1954 Act (that did not happen here). If landlords do find themselves in this situation and have a break option in a protected tenancy, they should also take steps to serve a section 25 notice on the protected tenant and, if they wish to bring the tenancy to an end, have their house in order when it comes to their grounds for opposing renewal of the lease (that did not happen in this case). Landlords should also be alive to the need to serve a counter-notice in response to a section 26 request if they wish to oppose renewal (again, it seems that no counter-notice was served).

From a tenant’s perspective, when taking on a sublease it is extremely important to ascertain whether any superior leases contain a break clause and be aware that, if exercised, this will by common law extinguish their lease and if they are not a protected tenant, their right to occupy the premises.

Fast Drinks Ltd v Cetyl International Group Inc [2016] EWHC 3501 (QB)