In Norwich Union Life & Pensions Ltd v Linpac Mouldings Ltd, a lease contained a break clause that was expressed to be personal to Linpac Mouldings Ltd (Linpac). Linpac assigned the lease to a group company (Ecomold), which was later sold out of the group. Ecomold subsequently went into administration. Ecomold applied for landlord's consent to re-assign the lease to Linpac.
The landlord refused consent on the ground that the assignment would create a risk that Linpac would seek to terminate the lease, to the landlord's disadvantage. The assignment took place nonetheless and Linpac purported to exercise the break.
The High Court had to decide three issues:
- whether Linpac could have operated the break clause after the assignment to Ecomold but before it re-acquired the lease
- whether Linpac could exercise the break after the lease had been re-vested in it
- whether the landlord had unreasonably withheld consent to the assignment.
Linpac had argued that it could exercise the break clause at a time when the lease was not vested in it. Therefore, it argued, since the position would not change, no prejudice would be caused to the landlord by the assignment back to Linpac.
The court held that the break clause had to be interpreted in accordance with commercial common sense. The proposition that a lease could be terminated by someone who once was, but no longer is, the tenant in possession made no commercial sense. It would enable a former tenant to deprive a landlord of his rental income, even if the current tenant was able and willing to pay it. The court therefore ruled against Linpac on the first issue.
Turning to the second issue, the court thought that if a break right could be revived this would give rise to continuing uncertainty, especially on a sale of the reversion. There was no commercial sense in attributing to the parties an intention that the right should revive if Linpac re-acquired the lease. A tenant who no longer wished to occupy the premises itself but who wished to retain the ability to operate its personal break right could underlet, instead of assign the lease. The court therefore also ruled against Linpac on the second issue.
However, it was apparent from the authorities reviewed by the court that there was some legal basis for Linpac's argument that the break option would revive following the assignment back to it. A refusal of consent in order to avoid the operation of a break clause which will cause a loss of rental income to the landlord is a reasonable refusal. On that basis, the landlord's appreciation of the legal position, and its refusal of consent, was not unreasonable. That was so even though, ultimately, the landlord's fear of Linpac actually being able to exercise the break turned out to be unfounded.
Things to consider
It is interesting that the court found that the landlord was entitled to refuse consent to assign even though in actual fact its reason for doing so could never come to pass. The court's reasoning was that a reasonable landlord may seek to avoid not only an undesirable outcome which must occur, but also one which he reasonably fears may well occur, not least where that involves the prospect of unwelcome litigation.
Landlords and tenants alike will be relieved at the court's ruling that a former tenant cannot exercise a break right after it has divested itself of the lease. The court pointed out that, since most break clauses are subject to a number of conditions such as delivering vacant possession and compliance with the tenant covenants, the co-operation of the current tenant would be required in order to operate the break. However, the court did not consider the possibility that the landlord could waive compliance with the conditions and therefore make the break effective.
The court did however make the point that although the break clause provided for notice to be served on the landlord, it made no provision for notice to be served on the current tenant. If the effect of the break clause was that Linpac could terminate the lease without the knowledge of the tenant in possession, this would be astonishing. The court also thought that, where the current tenant had security of tenure, any arrangement between the former tenant and the current tenant to work together to operate the break would be void under section 38 of the Landlord and Tenant Act 1954, as it would preclude the tenant from making an application for a new lease. It would also undermine the purpose of making a break right personal to a particular tenant if, after an assignment, the current tenant could still work with the former tenant to exercise it.
The court accepted that it would be theoretically possible to create a lease which was capable of termination by someone who was neither the landlord nor the tenant, but thought that this would be an extraordinary creation, and that very clear words would be needed. Of course, there are a number of circumstances not considered by the court where this is already the case. A liquidator may disclaim a lease. A sublease may be determined through the forfeiture of the headlease by the superior landlord, or the operation of a landlord's break right in the headlease. However, these situations are generally well understood by tenants, and none results from an action taken by a person in their capacity as a former tenant.