Commercial lease – Assignment – Break clause in licence to assign – Right to break personal to appellant as assignee – Appellant assigning to associated company with consent of respondent landlord – Subsequent reassignment without respondent’s consent – Respondent refusing consent on ground relating to risk of appellant exercising break clause – Whether respondent unreasonably withholding consent – Whether appellant able to exercise break clause while not the tenant – Whether right to break reviving on reassignment – Appeal dismissed
Several units in the respondent’s industrial estate were let under two leases for terms of 99 years from 1972. Each lease contained a covenant against assigning or subletting without the landlord’s prior written licence, which was not to be unreasonably withheld. In 1986, the appellant took an assignment of the leases with the respondent’s consent. Each of the licences to assign contained a break clause, which was personal to the appellant, permitting it, as “the assignee”, to terminate the leases in December 2010 by giving 18 months’ prior notice.
In 2005, the appellant assigned the leases to an associated company, again with the respondent’s consent. However, in 2008, that company went into administration and the administrators sought to reassign the leases to the appellant. By then, the units were empty, the industrial estate was run-down and many units had been demolished. The respondent refused its consent to the reassignment owing to concerns that the appellant might seek to terminate the leases pursuant to the break clause in the original licence to assign, thereby resulting in the loss to the respondent of a secure income of £600,000 pa. The appellant none the less proceeded with the reassignment and gave notice to terminate the leases.
The respondent sought and obtained declarations that: (i) its refusal of consent to the assignment was reasonable; and (ii) the appellant’s right to break the leases was irretrievably lost when it assigned those leases: see [2009] EWHC 1602 (Ch); [2009] PLSCS 272. The appellant appealed against that part of the judge’s order concerning the loss of the right to break the leases.
Held: The appeal was dismissed.
The 1986 licence and the 2005 assignment were to be interpreted as giving effect to the parties’ intentions, which should be ascertained in the light of the commercial purpose and context of those documents and the factual setting as known to the parties.
The right of a landlord or tenant to terminate a tenancy by notice was incidental to the relationship of landlord and tenant. Similarly, the benefit and burden of a break clause in a lease would ordinarily pass with the reversion or the term as touching and concerning the respective estates of the landlord and the tenant and as conditions of the enjoyment of those estates: Wordsley Brewery Co v Halford (1903) 90 LT 89, Stait v Fenner [1912] 2 Ch 504, City of London Corporation v Fell [1993] 1 EGLR 93; [1993] 04 EG 115 and Harbour Estates Ltd v HSBC Bank plc [2004] EWHC 1714 (Ch); [2005] 1 EGLR 107 considered.
A provision entitling a former tenant to terminate a lease when the lease was not vested in it would be extraordinary because: (i) it would be difficult to obtain vacant possession from a business tenant entitled to the benefit of the security of tenure provided by the Landlord and Tenant Act 1954; (ii) the landlord or any assignee would probably not want to accept such a provision; and (iii) a more obvious and straightforward route could achieve the same end, namely the tenant subletting rather than assigning: Max Factor Ltd v Wesleyan Assurance Society [1996] 2 EGLR 210 applied.
In no reported case had the court interpreted a contractual provision as entitling a party to break a lease when it was neither the landlord nor the tenant. That included recent cases in which the Court of Appeal had considered the operation of a tenant’s right to break a lease where the break provisions limited the right to the original assignor tenant. Accordingly, it would be reasonable to expect that competent property advisers would take particular care to make unambiguously clear, if intended, that a party would be entitled to break a lease not only when it was the tenant but even after it had assigned the lease: Olympia & York Canary Wharf Ltd v Oil Property Investments Ltd [1994] 2 EGLR 48; [1994] 29 EG 121 and Brown & Root Technology Ltd v Sun Alliance & London Assurance Co Ltd [1997] 1 EGLR 39; [1997] 18 EG 123 considered.
Per curiam: It was undesirable for the courts to reach radically different interpretations of break clauses in commercial leases based on slight differences in language that were not intended to achieve different objectives.
Christopher Nugee QC and Timothy Dutton (instructed by Linklaters LLP) appeared for the appellant; Martin Rodger QC and Elizabeth Fitzgerald (instructed by Aviva Legal Services) appeared for the respondent.
Eileen O’Grady, barrister
