Tenants that are aware of the risks of tying themselves to long leases often negotiate break clauses. However, because the successful exercise of break rights can leave landlords with vacant premises and, therefore, without rental income, landlords frequently attach conditions to the exercise of break rights. One of the most common is to make break rights personal to a particular tenant.
Aviva Life & Pensions UK Ltd (formerly known as Norwich Union Life & Pensions Ltd) v Linpac Mouldings Ltd [2010] EWCA Civ 395; [2010] PLSCS 112 concerned a manufacturing company that took an assignment of a 99-year lease. Unusually, the lease reserved a full market rent, which was subject to regular reviews, and offered the tenant no means of escape, short of insolvency or dissolution. Consequently, the licence to assign contained a break clause that was exercisable after 25 years. In 2005, Linpac took a further lease of additional premises from the same landlord for a term expiring in 2070, and negotiated a similar right to break.
Linpac assigned the leases to a company that subsequently went into administration. It served break notices on the landlord in an attempt to terminate its rental and other liabilities under the leases.
The High Court upheld the landlord’s argument that the break clauses were personal to, and no longer exercisable by, Linpac. On appeal, Linpac argued that it had retained the right to operate the break clauses, even though the leases were not vested in it.
The Court of Appeal disagreed. It held that the right to terminate a lease is an incident of the relationship between a landlord and its tenant. Consequently, the benefit or burden of a break clause passes with the reversion or the term. It would be extraordinary if a former tenant were to have the right to terminate a lease when the lease was vested in an assignee, not least because of the difficulties of obtaining vacant possession from the occupier.
For these reasons, a competent property adviser should have taken particular care to make it clear that Linpac was to retain the right to break the leases, not only while it was the tenant but also after it had assigned the tenancies. The failure to do so was spectacular.
The break clauses referred to Linpac as “Linpac Mouldings Ltd only” and as “Linpac Mouldings Ltd as original tenant”. The descriptions suggested an intention to limit the company’s rights, rather than to expand what would otherwise be the conventional position that a tenant’s right to break is exercisable only by the tenant for the time being and, on assignment, passes to the assignee. Consequently, neither description achieved the extraordinary result that the company remained entitled to operate the break clauses.
The decision highlights the importance of auditing property portfolios when restructuring companies, to ensure that companies consciously choose between assigning and subletting properties where leases contain personal break rights that will be lost when leases are assigned.
Allyson Colby is a property law consultant
