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Unusual Break Clause Pitfall

Break Option Pitfall

It is an established legal principle that when a lease comes to an end any under lease will automatically terminate. Under The Act a tenancy created by an under lease will continue against the landlord due to security of tenure.

In Fast Drinks Ltd v Cetyl International Group Inc [2016] EWHC 3501 (2B) an unusual situation developed that caused conflict in respect of these established positions.

 

Chronology

Cetyl International Group Incorporated (CIG) entered into a head lease with James Cartwright (tenant) for a term expiring on 16 January 2016.

On 9 May 2011 the tenant granted an under lease of the property to Urban Enterprises Ltd (under tenant) for a term expiring on 15 January 2016.

On 16 May 2011, the under tenant granted a sub under lease of the property to Fast Drinks Ltd for a term which also expired on 15 January 2016.

CIG exercised the break clause contained in the head lease, terminating it on 17 July 2014. Subsequently in the normal course of events it would be expected that all under leases would then automatically terminate.

The reason for an issue arising is that the sub under lease entered into between the under tenant and Fast Drinks Ltd was not contracted out of the security provided by The Act.

Subsequently Fast Drinks Ltd requested a new tenancy commencing on 1 July 2015 from CIG pursuant to Section 16 of The Act.

CIG argued the Section 26 Notice was invalid because of the provision in Section 26(2) of The Act. They stated it meant the commencement date in a Section 26 request cannot be earlier than the date the sub under lease would come to an end or a Notice to Quit. Therefore the earliest commencement date Fast Drinks Ltd could include on a Section 26 request was the day after the expiry of the contractual term date of the sub under lease which was 16 January 2016.

The County Court Judge accepted CIG’s argument the Section 26 request was invalid, on the basis that the earliest commencement date for a new tenancy was indeed 16 January 2016, the date on which the sub lease would have expired if the break clause had not been exercised.

On that basis the County Court Judge concluded that because the Section 26 request was invalid, the Section 25 notice was valid.  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. Fast Drinks Ltd appealed the decision to the High Court.

 

High Court’s Decision

Overturning the earlier decision, it was held that the proviso in Section 26(2) did not apply as this was a post term request. The sub tenancy having come to an end in July 2014 by the break clause option having been effected by CIG. As a result the request was valid.

 

Points to Consider

1.       Landlords – the key point for landlords to consider is the issue of security of tenure of sub tenants when exercising a break clause. The best way for the landlord to protect themselves is at the point of drafting the head lease. The issues that arose in this case can be avoided if the head lease sets out that any sub leases must exclude the protection of the Landlord and Tenants Act 1954 and make sure this occurs in respect of any sub leases that are entered into.

2.       Tenants – the case highlights the importance of any tenant and under tenant reviewing carefully any superior leases for break clauses which could cut short the tenancy. The tenant needs to consider the effects of timings of break options and the indications of accepting a lease that does not have security of tenure.

 

If you would like any advice please contact David Richards in our Dispute Resolution Team.