The recent Court of Appeal decision in Norwich Union and Pensions v Linpac Mouldings Ltd 1 reinforces the principle that, once a tenant with the benefit of a personal break clause assigns a lease, in the absence of very clear wording to the contrary that break clause cannot later be exercised by the former tenant even if the lease is subsequently re-assigned to him.
Linpac Mouldings Ltd (“Linpac”) took an assignment of two leases at full rack rent, with an upwards only rent review every seven years. As part of the licence to assign, Linpac negotiated an option to break the lease on 1 December 2010. The option was expressed to be for the benefit of “the Assignee (meaning Linpac Mouldings Ltd only)”.
In 2005, Linpac was granted a further lease by the landlord, Norwich Union Life and Pensions (“NU”). This lease also contained a break option for 1 December 2010, expressed to be for “Linpac Mouldings Ltd as original tenant” or group companies of Linpac.
Linpac assigned all three leases to a group company, which shortly afterwards left the group, changing its name to Ecomold, and became insolvent. NU sought to recover rents from Linpac in its capacity as the previous tenant. Ecomold re-assigned the leases to Linpac (without NU’s consent) and Linpac served notice on NU purporting to break the leases.
The issues before the Court in relation to the operation of the break option were:
- Did Linpac’s right to break the leases continue even once it had assigned the leases; and
- If not, did the re-assignment of the lease to Linpac operate to revive the right to break the lease?
The High Court’s decision was that:
- It made “no commercial sense” for Linpac’s right to break the lease to continue after assignment. Accordingly, Linpac’s right to break the leases ceased when it assigned them to Ecomold; and
- Once a personal break clause has lapsed it cannot be revived by re-assignment to the tenant who had the benefit of the clause (following Max Factor Ltd v Wesleyan Assurance Society2 and Equinox Industrial (GP2) Ltd v Sketchley Ltd3).
Linpac appealed the decision on the first point. The Court of Appeal endorsed the findings of the High Court, stating that it would be “extraordinary” for a lease to allow a former tenant to exercise a break option when the lease was not vested in them, and that there was no clear indication that this is what was intended in the wording of the leases. However, it was conceded that it may be “technically possible” to provide for a personal break clause to continue even after assignment.
The possibility of a personal break clause continuing after assignment has not been finally ruled out. However, it is evident from the Court of Appeal’s decision that the Courts will be very unwilling to find, in the absence of “unambiguously clear” wording, that a personal break option will continue in this way. Any party seeking to rely on such a clause in future cases will have an uphill struggle to succeed in the light of this case.
In any event, should a party be able to rely on a subsisting personal break clause, they may face substantial difficulties in complying with the terms of the break clause. This was specifically pointed out in the High Court judgment. The judge considered that ensuring vacant possession on termination, especially where the current tenant had the protection of Part II of the Landlord and Tenant Act 1954, would prove problematic. In addition the former tenant would also struggle to ensure that other conditions of the break clause, such as the payment of rent and compliance with repairing obligations, were complied with. In practical terms the former tenant would need to enter into an agreement with the tenant in possession, however such an agreement may in itself fall foul of the anti-avoidance provisions in clause 38 of the Landlord and Tenant Act.
In practical terms, this case further supports the view that once a tenant has assigned a lease with a personal break clause, that clause is unlikely to be operable. If a tenant wishes to retain their personal break option whilst passing possession of the premises to another then a far less problematic solution (where possible) would be to sub-let the property and exclude the underlease from the provisions of the 1954 Act.