Just over
a year ago we noted a first-instance decision concerning the point at which an
original tenant loses the benefit of a personal right to break. The outcome
appeared perfectly correct and our main purpose in alluding to the case was as
part of a series of notes drawing attention to the mounting litigation on
rights to break. However, this case, Brown &
Root Technology Ltd v Sun Alliance & London Assurance Co Ltd, has
just been overturned by the Court of Appeal (see [1997] 18 EG 127), causing
understandable consternation.
Here, an
option to break had been securely drafted so as to ensure that it was personal
to the first tenant and that it should ‘cease to have effect upon the
assignment of the lease by the lessee’. Some five years after the lease was
granted it was decided that the tenant’s holding company should take over
responsibility for all its leasehold obligations and to this end the tenant
applied to the defendant landlord for its consent to an assignment of the
lease. This was readily forthcoming and completion of the matter between the
two companies and the landlord took place in December 1993. Thereafter, the
landlord treated the parent company as the tenant and rent was paid and
accepted. However, because of stamp duty complications arising from the
transfer of various assets, including this lease, the parent company had still
not registered this transfer with the Land Registry by September 1994.
It was at
about this time that plans for the demised premises changed. The Brown &
Root group was now planning to acquire land in Leatherhead and to relocate its
offices there. Accordingly, on September 19 the subsidiary company served
notice on the landlord that it was exercising the right to break, pointing out
that the lease was still registered in its name. Given that the property had
been let in 1989 at £1.3m pa, far above its present value, this turn of events
was decidedly unwelcome to the landlord. Hence the present proceedings in which
the central issue was whether the lease had been assigned; if so, there was no
longer any right to break.
The tenant’s
argument was that nothing less than the legal transfer of its legal estate was
sufficient to deprive it of the right to break. The Land Registration Act
clearly provides that, until the transfer is registered, the assignor is deemed
to remain the proprietor of the legal estate; no such registration had taken
place and, accordingly, it retained its right to break. The landlord argued
that, certainly for the purposes of a clause such as this, an assignment takes
place once the assignor has completed all the steps which are in its power to
take.
On this
basis, an assignment had taken place on completion, ie once the assignment has
been duly executed. Any further legal steps, notably the registration of the
transfer, are for the assignee to carry out and are outside the control of the
assignor. The landlord’s alternative argument was that, if no assignment had
taken place, the tenant was estopped from arguing that the lease had not been
assigned; it had represented that the lease had been assigned and the landlord
had acted on that basis.
At first
instance, Judge Paul Baker QC ruled in favour of the landlord, accepting that,
for these purposes at least, the assignment had taken place at completion. Although
not strictly necessary, he did consider the landlord’s arguments on estoppel
and rejected these on the basis that there had been no detrimental reliance.
The story in
the Court of Appeal was very different. Giving the only judgment, Mummery LJ
was quite satisfied that, while the first-instance decision might have been
correct had the dispute been between assignor and assignee, it was not where a
third party (ie the landlord) was involved. There was binding Court of Appeal authority
(Gentle v Faulkner [1900] 2 QB 267) for the proposition that a
covenant restricting a tenant’s right to assign applied only to legal
assignments and there was no reason why this should not apply here. Given that
he agreed with the trial judge’s conclusion on estoppel, this led inexorably to
the conclusion that there had not been an assignment which was sufficient to
deprive the tenant of its right to break.
There is a
widespread feeling that the landlord is entitled to feel somewhat aggrieved. It
is suggested that the Court of Appeal has taken an unnecessarily narrow view
and produced yet another ruling in which the result hinged on the fortuitous
differences between a title which is registered and one which is not. The
outcome, which seems distinctly unfair on a landlord, could have been readily
avoided by the court and appears to pave the way for tenants in the same
position as those in the present case to keep their options open.
It is
suggested that the Court of Appeal need not have viewed the decision in Gentle
v Faulkner as binding. That case concerned the scope of a covenant
restricting a tenant’s right to assign and it is well accepted that such a
covenant is subject to the contra proferentem rule, ie it is construed
against the landlord. There seems no good reason to approach the interpretation
of a right to break in the same way (the very different approach adopted by the
Court of Appeal in Max Factor Ltd v Wesleyan Assurance Society
[1996] 2 EGLR 210 stands in marked contrast). The clause had been quite clearly
drafted so as to be limited to the period while the original tenant remained
the tenant; both the landlord and that tenant had carried out all the legal
steps within their power to effect assignment; it was only the failure (for perfectly
legitimate reasons) of the assignee to register with the Land Registry which
produced this unexpected bonus. It is hard not to conclude that, in the not
uncommon situation where (as here) the assignor and assignee are associated
companies, omitting to register might in future be seen as a positive option.
One final
point. The Landlord and Tenant (Covenants) Act 1995 makes it clear that, for
post-1995 leases, an equitable assignment is normally sufficient for the
purposes of that Act. Brown & Root could create a welter of problems
if applied to such a lease.
