Commercial lease – Assignment – Break clause in licence to assign – Right to break personal to defendant as assignee – Defendant assigning to associated company with consent of claimant landlord – Subsequent reassignment without claimant’s consent – Claimant refusing consent on ground relating to risk of defendant exercising break clause – Whether claimant unreasonably withholding consent – Whether defendant able to exercise break clause while not the tenant – Whether right to break reviving on reassignment – Claim allowed
Several units in the claimant’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 defendant took an assignment of the leases with the claimant’s consent. Each of the licences to assign contained a break clause, personal to the defendant, permitting it, as “the assignee” to terminate the leases in December 2010 by giving 18 months’ prior notice.
In 2005, the defendant assigned the leases to an associated company, again with the claimant’s consent. However, in 2008, that company went into administration and the administrators sought to reassign the leases to the defendant. By then, the units were empty, there being no demand for them; the industrial estate was rundown and many units had been demolished. The claimant refused its consent to the reassignment owing to concerns that the defendant might seek to terminate the leases pursuant to the break clause in the original licence to assign, thereby resulting in the loss to the claimant of a secure income of £600,000 pa. The defendant none the less proceeded with the reassignment. In April 2009, it gave notice to terminate the leases.
In proceedings brought by the claimant, issues arose as to whether: (i) it had unreasonably withheld its consent to the assignment; and (ii) the defendant was entitled to exercise the break clauses. The defendant contended that consent had been unreasonably withheld because: (i) it had been entitled to exercise the break clauses even while the leases were not vested in it, such that the reassignment did not prejudice the claimant; or, if that were wrong, (ii) the right to break the leases revived when it became the tenant once again, and it was unreasonable of the claimant to refuse consent for the sole purpose of preventing it from exercising that contractual right.
Held: The claim was allowed.
(1) The defendant had not been entitled to terminate the lease at a time when it was not the tenant in possession. The extent of its right to terminate the leases depended on the terms of the licences to assign, properly interpreted against the relevant factual background. That background included the nature of a break clause, which, ordinarily, was a right incident to the lease, which would pass to an assignee on assignment. The normal purpose of a break clause was to enable the tenant in possession to bring the relationship of landlord and tenant to an end, and, ordinarily, the person entitled to exercise the right would be the person in whom the legal estate was vested: Strait v Fenner [1912] 2 Ch 504 considered. Moreover, the language of the licence had to be interpreted in a way that made commercial common sense. The proposition that the lease could be terminated by a party that had once been, but no longer was, the tenant in possession made no commercial sense. Although it might be theoretically possible to create a fixed-term lease that could be terminated by a party that was neither the landlord nor the tenant, it would be an extraordinary if not unique creation and clear language would be required before such a construction could be justified.
(2) Moreover, the right to break the lease had not revived once the defendant became the tenant again on reassignment. There was no commercial sense in attributing to the parties an intention that the right should revive if the defendant reacquired the lease. Although the precise effect of the licence turned on the language used, the importance of certainty in the commercial and property world required that clauses of the same “family”, such as personal break clauses, should not be given radically different results based on slight differences in wording: Max Factor Ltd v Wesleyan Assurance Society [1995] 2 EGLR 210 applied.
(3) Consequently, the claimant’s fears regarding the defendant’s ability to exercise the break clauses on reassignment were unfounded. None the less, the question was not whether the claimant’s appreciation of the legal position had been correct or not but whether it had been a reasonable view to hold. In all the circumstance, the claimant’s appreciation of the legal position was not unreasonable. Moreover, it was reasonable for a landlord to refuse consent to an assignment in order to avoid the operation of a break clause that would cause it a loss of rental income: Olympia & York Canary Wharf Ltd v Oil Property Investments Ltd [1994] 2 EGLR 48; [1994] 29 EG 121. The claimant had not acted unreasonably in refusing consent to avoid what it saw as the potential loss of a large rental income that it was unlikely to be able to replace.
Martin Rodger QC and Elizabeth Fitzgerald (instructed by Aviva Legal Services) appeared for the claimant; Timothy Dutton (instructed by Linklaters LLP) appeared for the defendant.
Sally Dobson, barrister
