Landlord and tenant — Break clause operable by original lessee only — Whether break clause operable by original lessee on reassignment of lease
By an
underlease dated June 27 1985 the plaintiff, Max Factor Ltd, was granted a
25-year term of office premises subject to a mutual right to determine on
12-months notice. That provision referred to ‘the Lessee’ as meaning ‘Max
Factor Ltd only’. On November 16 1992, with the licence of the then landlord,
Max Factor assigned the lease to P. The landlord’s reversion was subsequently
assigned to the defendant society. On September 8 1993 the society executed a
licence permitting the assignment of the underlease back to Max Factor; the
assignment being executed on the same day. On June 15 1994 Max Factor served a
notice on the society purporting to determine the underlease under the break
clause. In Max Factor’s application for a determination that its break notice
was valid, it was contended on behalf of the society that Max Factor’s right to
exercise the early determination clause was not available after it had already
assigned the underlease and thereafter taken it back as reassignee.
determination clause was only vested in Max Factor so long as the underlease
remained vested in it as original grantee. That conclusion was a matter of the
language of the underlease and of commercial common sense. There was also
support in the judgment of Sir Donald Nicholls V-C in Olympia & York
Canary Wharf Ltd v Oil Property Investments Ltd [1994] 2 EGLR 48.
The following
case was referred to in this report.
Olympia
& York Canary Wharf Ltd v Oil Property
Investments Ltd [1994] 2 EGLR 48; [1994] 2 EG 121
This was an
application by the plaintiff, Max Factor Ltd, by originating summons for the
determination of the validity of a break notice served on the landlord,
Wesleyan Assurance Society.
David
Neuberger QC (instructed by Simmons & Simmons) appeared for the plaintiff;
Jonathan Gaunt QC (instructed by Coley & Tilley) represented the defendant.
Giving
judgment, LIGHTMAN J said: I have before me an originating summons which
seeks declarations as to the true construction of a clause in an underlease
conferring a right to service notice prematurely to determine the underlease
and as to the validity of a notice served by the underlessee in purported
pursuance of that clause.
A. Facts
By an
underlease dated June 27 1985 (‘the underlease’) and made between (1) Crowvale
Properties Ltd (Crowvale) (2) Max Factor Ltd (Max Factor) and (3) International
Playtex Inc (IPI), Crowvale demised to Max Factor office premises at Watermans
Park, High Street, Brentford (‘the premises’), for the term of 25 years from
June 24 1985 at the yearly rent of £305,000 subject to five-yearly reviews. IPI
was a party to the underlease as guarantor of the obligations of Max Factor,
its associate company. On the first such review with effect from June 1990 the
rent was increased to £392,500. The leasehold reversion was subsequently
assigned to Provident Mutual Life Assurance Association (PMLAA).
By a licence
dated November 6 1992 PMLAA gave their licence to the assignment of the
underlease by Max Factor to Proctor & Gamble (Cosmetics & Fragrances)
Ltd (P&G) and on November 16 1992 this assignment was executed. The
reversion was subsequently assigned by PMLAA to Wesleyan Assurance Society
(‘Wesleyan’) and on September 8 1993 Wesleyan executed a licence permitting the
assignment of the underlease back to Max Factor and such assignment was
executed the same day. On June 15 1994 Max Factor served on Wesleyan notice
purporting to determine the underlease pursuant to clause 5.09 of the
underlease.
B. Provision of underlease
The relevant
provisions of the underlease are as follows:
THIS
UNDERLEASE made on the 27th of June 1985 BETWEEN CROWVALE PROPERTIES LIMITED
… (hereinafter called ‘the Lessor’ which
expression where the context so admits include the person for the time being
entitled to the reversion immediately expectant on the determination of the
term hereby granted) of the first part MAX FACTOR LIMITED … (hereinafter called ‘the Lessee’ which
expression where the context so admits shall include the successors in title of
the Lessee) …
3.01 THE
LESSEE HEREBY COVENANTS with the Lessor to the intent that its obligations
hereinafter contained shall continue throughout the term as follows: …
3.32(b) Not
to assign the demised premises as a whole …
without the previous written consent of the Lessor (such consent not to
be unreasonably withheld) …
Mutual Right
to Determine
5.09 IF
either the Lessor or the Lessee (here meaning Max Factor Limited only) shall be
desirous of determining this present Lease at the end of the tenth year of the
term hereby granted and of such desire deliver to the other not less than
twelve months previous notice in writing and in the case of Max Factor Limited
pays all rent and six months further additional rent at the rate then
applicable (such additional rent being payable in full on the expiry of such
notice) then and in such case immediately after the expiration of the tenth
year of the term this Lease shall cease and be void but without prejudice to
any claim by either party against the other in respect of any antecedent breach
of any covenant or condition herein contained PROVIDED THAT for the avoidance
of doubt in the event of the Lessee (here meaning Max Factor Limited only)
assigning the interest in the demised premises prior to the expiration of the
tenth year of the term then the Lessors right to determine the term contained
in this Clause shall forthwith cease
…
Marginal Notes
5.11 The
clause headings and marginal notes shall not affect the interpretation of those
present.
5.12 The
surety … hereby covenants … PROVIDED that in the event of either
5.12.1 an
assignment or transfer by Max Factor Limited of its entire interest hereunder
or
5.12.2 Max
Factor Limited no longer being a subsidiary or associated company of
International Playtex Inc …
THEN if Max
Factor Limited or International Playtex Inc procures that an alternative surety
enters into a direct covenant by deed with the Lessor in terms mutatis
mutandis with the provisions of this clause the liability of International
Playtex Inc shall cease forthwith upon completion of such deed
…
C. Issue
The issue
between the parties is whether upon the true construction of clause 5.09 the
right of determination thereby conferred on ‘the Lessee (here meaning Max
Factor Limited only)’ was exercisable by Max Factor by its notice dated June 15
1994. Mr David Neuberger QC, on behalf of Max Factor, says that it was. Mr
Jonathan Gaunt QC, on behalf of Wesleyan, says that the right to serve such a
notice expired on the assignment by Max Factor of the underlease to P&G and
did not revive on the reassignment to Max Factor.
The issue is a
short one, but despite (or perhaps because of) the quality of counsel’s
submissions none the easier for that. Certain matters are however I think quite
clear:
(1) The right
of the lessor to determine the underlease pursuant to the clause ceased upon
the assignment by Max Factor. The opening words of clause 5.09 required the
lessor to serve notice of its desire to determine the underlease on ‘the
other’, ie ‘the Lessee (here meaning Max Factor Limited only)’, the clear
implication being that the notice was required to be served on Max Factor while
it was ‘the Lessee’ of the premises. To avoid any doubt remaining that this was
so, and to resolve any doubt whether the formula of words used allowed of
exercise by the lessor if after an initial assignment by Max Factor the underlease
was reassigned to Max Factor, the proviso spells out in plain language that the
lessor’s right is not to survive an assignment by Max Factor;
(2) Leaving
aside for the moment the position of Max Factor as reassignee, no assignee of
the underlease has any right to determine the underlease pursuant to clause
5.09: assignees are expressly excluded from the definition of ‘lessee’ for this
purpose (see also Olympia & York Canary Wharf Ltd v Oil Property
Investments Ltd [1994] 2 EGLR 48 at p50F);
(3) Notwithstanding
an ingenious argument by Mr Neuberger to the contrary, Max Factor is given no
right to exercise the right to determine the underlease unless at the time of
exercise the underlease is vested in it. That this is so is made apparent by a
number of factors:
(a) Clause
5.09 reads: ‘IF … the Lessee (here
meaning Max Factor Limited only) shall be desirous …’, not simply ‘IF Max
Factor Limited shall be desirous’ (compare the language of the condition
imposed for a valid exercise of the right by Max Factor, namely ‘and in case
Max Factor Limited pays all rent’ and of clause 5.12.1). The language used
spells out the qualification that Max Factor must be ‘the Lessee’ at the date
of service of notice by Max Factor on the lessor, ie a person in whom the
underlease is then vested.
(b) The
requirement for a valid service of a notice by the lessor is service ‘on the
other’. That is a requirement (as I have indicated in (1) above) for service on
Max Factor while it is the lessee.
(c) The
clearest language would be required to justify a construction of a clause, such
as the present, in a lease that the right to determine the lease was intended
to be vested in the lessee in a capacity other than as lessee and to be
exercisable when he no longer has any interest in the lease. I do not think
that such language is present in this case.
(d) In his
judgment in Olympia & York, supra at p50L, where there was a
practically identical provision, Sir Donald Nicholls V-C held that the right of
the tenant was lost when the tenant assigned the lease.
The much more
difficult question raised is whether the right is available to Max Factor only
so long as the underlease is vested in Max Factor as the original lessee or
whether it is also available to Max Factor after it has already assigned the
underlease and thereafter taken back the underlease as reassignee.
There is one
authority (the Olympia & York case supra) to which I must make
reference. There tantalisingly the Court of Appeal was faced with determining
the rights of the parties under a lease for all practical purposes in the same
terms as the underlease, but because both parties asked the court to proceed on
the basis of an agreed construction (namely that pressed by Max Factor in this
case) this question did not have to be decided. The landlord (L) granted a
lease to the second plaintiff (P2) and P2 assigned to the first plaintiff (P1).
The reserved rent was over £1m, but with a collapse in the market the rental
value of the demised premises was only some £450,000. P1 became insolvent. Both
P1 and P2 wanted the break clause to be triggered to avoid further liability
under the covenant of the lease for payment of the reserved rent, rent for
which P1 was liable under the doctrine of privity of estate and for which P2
was liable (so far as the rent was unpaid by P1) under the doctrine of privity
of contract. The agreed means to achieve this object was a reassignment back to
P2 and then exercise by P2 of a provision in the lease in the terms of clause
5.09. For this purpose P1 applied for licence to reassign. L refused consent to
the assignment on the ground that consequent on such assignment P2 would indeed
exercise the break clause and this would reduce the value of the reversion by
some £6m. L, P1 and P2 all wished the question whether consent had been
unreasonably withheld to be decided on the basis that, if the reassignment was
permitted and effected, the right to determine would be exercisable by P2. P1
and P2 took this position no doubt because only on this basis would there be
any purpose in making the reassignment. L took this position because it was the
existence of this damaging consequence of the proposed assignment which
explained and justified the refusal of consent. The Court of Appeal, on the
agreed basis as to the entitlement of P2 to exercise the right of determination
if the reassignment took place, held that L had quite reasonably refused its
consent.
The court
accordingly did not have to decide the question before me. While Leggatt and
Henry LJJ were content in their judgments to proceed on the agreed basis
without any comment as to its correctness, Sir Donald Nicholls V-C in the
leading judgment expressed serious doubts whether it was correct. At p50M, he
said as follows:
One asks
oneself why the right conferred by the break clause was made personal to
Enterprise [ie P2]. There is no obvious answer to this. There would perhaps be
a certain commercial logic in confining the right to Enterprise so long as
Enterprise throughout remained the tenant. Enterprise could pull out after 10
years if it wished. But if, meanwhile, Enterprise chose to realise its
investment by disposing of its entire interest by assignment, then its right to
withdraw would lapse. However, neither party contended before us that
Enterprise’s right is so confined. Quite what is the commercial rationale which
would revive Enterprise’s right to terminate if, having assigned the lease, it
takes a reassignment, is not apparent on the material before us.
After anxious
considerations I have reached the firm conclusion that the right under clause
5.09 was only vested in Max Factor so long as the underlease remained vested in
it as original grantee and I do so essentially for three reasons:
(a) As a
matter of language
(1) The right
to determine is granted to ‘the Lessee’ here meaning Max Factor Limited only)’.
There are two components in the make-up of the grantee of the right: the
grantee must be ‘the Lessee’ and must be Max Factor. Both components point, as
it seems to me, to Max Factor as original grantee. The primary meaning of ‘the
Lessee’ as defined in the underlease is Max Factor as the original grantee of
the underlease if and so long as it retained the underlease: the secondary
meaning arises only in the event of a subsequent assignment by Max Factor, when
the primary meaning is extended to include successors in title. The formula
‘the Lessee (meaning Max Factor Limited only)’ again points to Max Factor
enjoying the right only so long as the underlease remains vested in it as
original grantee. In short the language appears to me peculiarly apt to limit
the right to the period that Max Factor continues to hold as original grantee.
(2) I find
support in the language of the condition for a valid exercise by Max Factor,
namely ‘in the case of Max Factor pays all rent’. This is some indication of an
intention that the right shall only be exercisable in a situation where Max
Factor alone has ever been liable to pay and alone has paid rent, ie there has
been no assignment
(3) (Even
leaving aside as required by clause 5.11 the heading to clause 5.09) the scheme
of clause 5.09 is indicative of an intent that the rights of determination of
the lessor and Max Factor shall be mutual and co-terminus. The presence of the
words in the proviso ‘for the avoidance of doubt’ manifests the intention of
the parties that the language of the earlier part of clause 5.09 should limit
the lessor’s right of determination to the period while Max Factor held the
underlease as original grantee. If the language of the earlier part is so read,
as it can be so read, the right of Max Factor should likewise be read as so
limited.
(4) In the
absence of a clear indication of intent to the contrary, the court should be
slow to construe a lease as creating a right as intended to run with the lease
but, though not exercisable after an assignment by the original lessee by any
assignee, yet (in the event of a reassignment to him) exercisable by the
original lessee. Such an exceptional and extraordinary incident of a lease
requires clear flagging by the draftsman. Ambiguities should not lightly be
resolved in a way which results in a landlord’s licence to reassign to the
original lessee producing what may be far reaching unintended and unforeseen
adverse consequences for the landlord and pure bounty for the tenant.
(b) As a
matter of commercial common sense
I find it
difficult to believe that the parties can have intended that the right of
determination should survive an assignment by Max Factor. The apparent
rationale for the insertion of the provision in the underlease was to give Max
Factor a right at the expiration of the 10th year of the underlease to
determine its further liability under the covenants in the underlease if it has
not already assigned the underlease (and accordingly has not assigned the
primary liability to fulfil the covenants to someone else). In the case where
there has been an assignment by Max Factor, it would of course continue to be
liable under the covenants in the underlease if the assignee defaulted, but it
could reasonably be expected that Max Factor would take the necessary care in
selection of assignee and that Max Factor should take the risk if its selection
proved faulty. Max Factor would have a commercial interest in such an
eventuality in having a right to terminate the underlease, but I cannot think
that it is reasonable to infer that the parties intended that Max Factor should
be granted a right to terminate in that eventuality or in the eventuality that
for this, or any other reason, Max Factor should take a reassignment. In case
Max Factor took a reassignment, I see no reason why it should be, or should
have been intended to be, in any wise in a different position from that of any
other assignee.
(c) As a
matter of authority
I find some
support in the passage from the judgment of Sir Donald Nicholls V-C, with whose
reasoning I respectfully agree, albeit the question did not arise from decision
in that case and the other members of the court found it unnecessary to
consider the problem.
D. Order
I shall
accordingly declare that upon the true construction of the underlease Max
Factor has no right to determine the underlease by giving notice pursuant to
clause 5.09 and that the notice dated June 15 1994 is void and of no effect.
