[View without highlighting]
[Printable RTF version]
||Neutral Citation Number:  EWHC 1602 (Ch)
||Case No: HC093001137
IN THE HIGH COURT OF JUSTICE
||Royal Courts of Justice
London WC2A 2LL
||21 May 2009
B e f o r e :
MR JUSTICE LEWISON
||NORWICH UNION LIFE AND PENSIONS
||- and -
||LINPAC MOULDINGS LTD
Digital Transcript of Wordwave International, a Merrill Communications Company
101 Finsbury Pavement London EC2A 1ER
Tel No: 020 7422 6131 Fax No: 020 7422 6134
Web: www.merrillcorp.com/mls Email: firstname.lastname@example.org
(Official Shorthand Writers to the Court)
MR M RODGER QC and MS E FITZGERALD (instructed by Aviva Legal Services) appeared on behalf of the Claimant
MR T DUTTON (instructed by Linklaters LLP) appeared on behalf of the Defendant
HTML VERSION OF JUDGMENT
Crown Copyright ©
MR JUSTICE LEWISON:
- Norwich Union Life and Pensions Limited own a rundown industrial estate in Southend-on-Sea. It is called the Prittle Brook Industrial Estate. The site of the estate itself runs to some 10.5 hectares. Originally it consisted of a mix of industrial buildings and warehouses but many of them have now been demolished. There is now no demand for units on the estate.
- Back in the 1970s Norwich Union's predecessor in title granted two leases of units on the estate to Pye of Cambridge Limited. Each lease was dated 4 February 1972. The first of the leases contained a demise of unit 2, the second contained a demise of units 9-12, 17-18 and 22-23.
- The term of each lease was a term of 99 years from 1 December 1971. Each lease contained a tenant's covenant not to assign the whole of the demised premises or underlet or part with possession of the same without first obtaining the licence of the landlord in writing.
- As a result of section 19 of the Landlord and Tenant Act 1927, each covenant is subject to a proviso that the landlord's consent cannot be unreasonably withheld. The provisions on subletting also permit, with the landlord's consent, subletting in parts, up to a maximum of three occupations per unit.
- By April 1986 the 1972 leases had become vested in National Plastics and the reversion expected on the leases had become vested in Norwich Union.
- On 4 April 1986 Norwich Union granted National Plastics licence to assign each of the 1972 leases to Linpac Mouldings Limited (Linpac). Each of the two licences contained a break clause. For practical purposes they are in the same form. It is only I think necessary to refer to the licence relating to unit 2.
- The relevant parts of the licence are as follows. First the parties are introduced. Linpac is described in the following terms:
"Linpac Mouldings Limited whose registered office is at 1 Charles Street, Louth, Lincolnshire (hereinafter called 'the assignee')."
- Clause 1 of the licence gave licence to assign the demise premises to the assignee for the residue of the term. Clause 2(i) contained a covenant by the assignee:
"As from the date of the completion of the assignment and thenceforth during the residue of the term to pay the rent reserved by the Lease (including rent and any balancing payments, insurance premiums, rates or other payments which may have accrued or become payable in respect of any period prior to the aforesaid dates) and to observe and perform the covenants and conditions on the part of the lessee in the Lease contained."
- Clause 3 contained an obligation on the part of the landlord to release the original tenant and the previous assignor from liability on particular dates. Clause 5 contains the break clause with which I am concerned. It read as follows:
"The Landlord and the Assignee hereby agree that if the Assignee (meaning Linpac Mouldings Ltd only) shall desire to determine the Lease on the First day of December Two thousand and ten and shall give to the Landlord not less than eighteen months previous notice in writing of such desire and subject to compliance with the provisos hereinafter contained and subject to vacant possession of the demised premises being given then immediately on the expiration of such notice everything in the Lease shall cease and be void but without prejudice to the rights and remedies of either party against the other in respect of any antecedent claim or breach of covenant provided that:
(i) the Assignee shall up to the date of such determination pay the rent and in all material respects perform and observe the covenants on the tenant's part reserved and contained in the Lease;
(ii) the Assignee shall pay to the Landlord on or before the date twenty eight days prior to the determination of the said notice a sum equivalent to two years annual rent payable in respect of the demised premises at the first day of December Two thousand and ten or the sum of NINETY SEVEN THOUSAND POUNDS (£97,000), whichever shall be the greater;
(iii) the determination of the lease aforesaid shall take place simultaneously with the determination by the assignee of the two leases dated the fourth day of February One thousand nine hundred and seventy two of the premises known as Buildings Number 8, 9, 10, 11, 12, 13, 14, 15, 17, 18, 22 and 23 Priory Crescent Industrial Estate, Southend on Sea."
- Proviso 3 has subsequently been amended by a deed of variation so as to eliminate reference to units whose leases had been surrendered by agreement. On 18 February 2005, Norwich Union granted a lease of unit 8 directly to Linpac Mouldings Ltd. It also included, at clause 6, a tenant's option to determine on 1 December 2010. Clause 6.2 of the lease provided as follows:
"If the Tenant wishes to determine this Lease on the Determination Date, it must:
6.2.1. serve notice upon the Landlord not less than eighteen months before the Determination Date of its intention to determine its Lease;
6.2.2. pay the rents and other sums payable under this Lease and materially perform and observe the covenants and conditions on the part of the Tenant contained in this lease up to the Determination Date;
6.2.3. yield up the Premises on the Determination Date with vacant possession and, otherwise, in accordance with clause 3.5;
6.2.4. pay to the Landlord on or before 3 November Two thousand and ten a sum equivalent to two years annual rent payable in respect of the Premises at 1 December Two thousand and ten or the sum of Fifty eight thousand pounds (£58,000) whichever shall be the greater;
6.2.5. simultaneously determine the two Leases each dated fourth day of February 1972 of the premises known as buildings numbered 2, 9, 10, 11, 12, 17, 18, 22 and 23 Priory Crescent Industrial Estate, Southend on Sea."
- Clause 6.5 of that lease provides:
"In this clause 6 references to "the Tenant" mean Linpac Mouldings Limited as original tenant or any company forming part of the same group of companies (within the meaning of S42 of the Landlord and Tenant Act 1954)."
- In January 2005, these leases were assigned with Norwich Union's consent by Linpac to Linpac Automotive Ltd. Linpac and Linpac Automotive Ltd were then associated companies. At some later date, Linpac Automotive Ltd changed its name to Ecomold Ltd and ceased to be a member of the same group as Linpac. In May 2005, Ecomold entered into administration and on 12 August 2008, Messrs Orton and Graham were appointed joint administrators. The units are now empty and there is no demand for them. The rents payable under the leases amount in aggregate to some £720,500 per annum, although the aggregate rent will fall in 2010 when some of the leases come to an end. Nevertheless, it will continue to be substantial amounting to some £600,000 per annum.
- On 11 March 2009, Ecomold sought Norwich Union's consent to the re-assignment of each of the leases to Linpac. On 19 March 2009, Norwich Union refused consent to the assignment of the 1972 leases but granted consent to the assignment of the remaining leases subject to certain conditions. The ground of refusal was expressed as follows in letters dated 19 March 2009:
"My client refuses consent. The grounds for refusal are that the assignment would create a risk that Linpac would seek to terminate the Leases to the Landlord's disadvantage and following the Court of Appeal decision in Olympia and York Canary Wharf Ltd v Oil Property Investments Ltd  2 EGLR 48, it is reasonable for my client to refuse."
- As a result of the Landlord and Tenant Act 1988, Norwich Union are confined to that reason, although they are entitled to amplify the detailed reasoning leading to that conclusion. Despite the refusal of consent, on 3 April 2009, Ecomold executed a transfer in form TR5 of all the leases to Linpac. Also on 3 April 2009, Ecomold and Linpac in its capacity as beneficial owner and assignee of the 1972 leases, purported to give notice to Norwich Union to determine the 1972 leases and the lease of unit 8.
- On 9 April 2009, Norris J granted Norwich Union an injunction restraining Linpac from serving any further notices to determine the 1972 leases and that relief has subsequently been continued until trial. Linpac has not yet become the registered proprietor of the leases. I understand that although it has applied to register the leases, the Land Registry has raised requisitions which have yet to be answered. These proceedings raise the following essential issues. (1) Did Norwich Union unreasonably withhold consent to the assignment of the 1972 leases? (2) Is Linpac entitled to exercise the break clauses to determine the leases (a) at any time after it assigned the leases to Linpac Automotive Ltd but before it re-acquired them or (b) after it re-acquired the leases?
- I must, I think, first identify the reason why Norwich Union refused consent. The ostensible reason was, as I have said, contained in the letter of 19 March. Mr Green, the fund manager responsible for the estate on behalf of Norwich Union, amplified Norwich Union's reasoning as follows:
"The leases are of significant value to Norwich Union. The building is antiquated and there is very little prospect of a replacement tenant being found. The secure income of some £600,000 a year until 2070 is as valuable to Norwich Union as it is onerous to Linpac."
- Norwich Union's in-house solicitor advised that the personal break had been rendered ineffective by the 2005 assignments but continued:
"As mentioned, the breaks for Units 2 and 9 etc are personal and are currently ineffective due to the assignment to Linpac Automotive Limited. In this situation if Ecomold do go into liquidation then we would still be able to pursue Linpac Mouldings Limited for arrears and breaches of covenant. Note the rest of the tenants and sureties along the chain have been released. Linpac could ask for an overriding lease following any S17 notice served but this overriding lease would not resurrect the break. Linpac Mouldings may decide to apply for an assignment of their interest thus trying to resurrect the break clause that they are able to action.
However, my view is that following the case of Olympia and York, we would be able to refuse consent to the assignment of the lease back to Linpac Mouldings Limited. I am not sure whether we could rely upon the later case of Max Factor Ltd v Wesleyan Assurance Society  2 EGLR 38 where it was ruled that an assignment back to, in that case, an undertenant did not restore the break option as it might depend on the wording of the break clause in that particular instance. The break clause in our instance does not state 'as original tenant' which may be a factor to consider."
- It is, however, right to say that this memorandum from the in-house lawyer, although made available to Mr Green's subordinate Mr Brand, does not appear to have been made available to Mr Green himself at the time. Nevertheless, when the application for licence to assign came in, Norwich Union hurriedly took counsel's advice. The content of that advice has not been disclosed. On 18 March 2009, both Mr Green and Mr Shepherd, a finance manager with Norwich Union whose source of information is Mr Green himself, filled in an internal form recording their views. Mr Green's view was recorded as follows:
"Linpac are previous lessees of these units, and so are liable under privity of contract. Rather than taking an overriding lease under the 1995 Act (Privity), they are trying to have the leases re-vested in their name. They are doing this to try and operate some personal break clauses."
- Mr Shepherd commented that there was no particular financial reason for refusing consent and he continued:
"I understand that due to the break clauses which are in place and would become operable following an assignment, that the assignment will subsequently be refused on these commercial grounds."
- On the following day on 19 March 2009, the decisions were made and are recorded in an internal email from Ms Johnson, an in-house lawyer, to Mr Green. Mr Green wanted to avoid the risk that Linpac might be entitled to terminate the 1972 leases and did not want to become involved in uncertain litigation. In the course of his cross-examination, Mr Green broadly confirmed that reasoning and, in particular, that Norwich Union wanted to avoid the potential loss of income in the event that the leases were terminated.
- Moreover, Mr Green said that if the leases were to be assigned to Linpac, he foresaw there would be a legal dispute and that Norwich Union was keen to avoid that. What he came back to time and again was that he was advised that it was reasonable for Norwich Union to withhold consent and that is what he did, although he did say that Norwich Union was further of the view that the break clause had ceased to be operable when Linpac first assigned the leases. Indeed, Mr Dutton persuaded him to agree that it was a dead cert.
- However, that evaluation is not borne out by the contemporaneous documentation although, as Mr Dutton points out, Norwich Union had declined to waive privilege relating to its core legal advice from counsel. Nevertheless, in my judgment, there was bound to be a risk and Norwich Union knew that. I find, therefore, that Norwich Union's ostensible reason for refusal was its real reason.
- It will be seen then that Norwich Union's reasoning proceeded in the following steps. (1) While the leases were vested in Ecomold, Linpac was not entitled to exercise the break clauses. (2) If the leases became vested in Linpac, Linpac would have a case for arguing that it was entitled to exercise the break clauses. (3) If the break clauses were exercised, Norwich Union would lose a large rental income which it was unlikely to be able to replace. (4) Consequently, it was reasonable to refuse consent in order to avoid that undesirable change to the status quo.
- On the face of it, that appears to be entirely reasonable. What then does Linpac say in answer? Mr Dutton submits (1) that Linpac were entitled to exercise the break clauses even at a time when the leases were not vested in it, (2) consequently, the re-assignment of the leases did not prejudice Norwich Union's position in the sense of exposing it to any greater risk than the risk that was already inherent in the contractual arrangements, and (3) since the licences to assign in favour of Linpac had granted it a break clause, it was unreasonable of Norwich Union to refuse consent for the sole purpose of preventing it from exercising that contractual right. This last point assumes that even if the right to break cannot be exercised while the leases are not vested in Linpac, it will revive once Linpac becomes the tenant again.
- In essence, therefore, Mr Dutton attacks the legal premises on which Norwich Union's reasoning was based but the question, in my judgment, at this stage is not whether Norwich Union was right or wrong. The question is whether they were reasonable. In Ashworth Frazer Ltd v Gloucester City Council  1 WLR 2180, the landlord refused consent to an assignment on the ground that the use proposed on the assignee be a breach of the lease. The assignee and, indeed, the tenant, disagreed with that interpretation of the lease but the House of Lords said that the landlord's refusal of consent was not unreasonable. Lord Bingham of Cornhill said at paragraph 5:
"Thirdly, the landlord's obligation is to show that his conduct was reasonable, not that it was right or justifiable."
- At paragraph 6(f), he said:
"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."
- Lord Rodger of Earlsferry said at paragraph 70:
"After all, a landlord considering whether to accept a tenant in the first place would almost certainly reject a person who would probably, even if not necessarily, use the premises in breach of a covenant in the lease. His decision to do so would be both rational and reasonable. It may be equally rational and reasonable for a landlord to withhold consent to an assignment to a prospective assignee who will probably, even though not necessarily, breach the covenant. In deciding whether to withhold consent to an assignment, reasonable landlords need not confine their consideration to what will necessarily happen. Like anyone else taking an important decision, they may have regard to what will probably happen."
- He went on to criticise the reasoning in a previous decision of the Court of Appeal which was overruled in Ashworth Fraser to the effect that the landlord had the same rights against an assignee as he had against the original tenant. Lord Rodger commented at paragraph 71:
"As an analysis of the landlord's legal position that is undoubtedly correct. But the reality is that a reasonable landlord could well look at the matter more broadly and see that his position would be significantly altered by the assignment. It is one thing to have a tenant who complies with the user covenant in the lease and against whom there is no need to take steps to enforce the covenant. It is quite another to have a new tenant who does not comply with, or who challenges the interpretation of, the user covenant and against whom the landlord might need to take steps to enforce it or to contest the tenant's interpretation, with all the inconvenience and potential cost involved."
- Thus the question under this head is whether Norwich Union's appreciation of the legal position was a reasonable view to hold. There is a body of authority which bears on these legal questions. Step 1: Could Linpac exercise the break clause at a time when the lease was not vested in it? In Olympia and York, a lease contained a break clause personal to ICI Petroleum Ltd, subsequently renamed Enterprise Petroleum Ltd. Enterprise assigned the lease to O&Y. O&Y wished to re-assign the lease to Enterprise so as to enable the latter to exercise the break clause. The landlord refused consent. The issue was whether the refusal was reasonable. The Court of Appeal held that it was.
- The case was argued on the basis that (1) unless the lease was vested in it, Enterprise could not operate the break clause and (2) if it re-acquired the lease, it would be able to exercise that right. Although Sir Donald Nicholls V-C, questioned the latter assumption, he did not question the former. Leggatt and Henry LJJ appeared to accept both assumptions as correct. The case for O&Y was argued by Mr Etherton QC (now Etherton LJ). He did not advance the argument that Enterprise were entitled to exercise the break clause even though the lease was not vested in it. Everyone took it as correct that a break clause could only be exercised by the tenant in possession.
- In Max Factor, a lease contained a break clause personal to Max Factor which was the original tenant. Lightman J held that the right to break was capable of exercise only while the lease remained vested in Max Factor and that it was irretrievably lost on an assignment. He expressly rejected an argument advanced by Mr Neuberger QC (now Lord Neuberger) that Max Factor could exercise the break clause even though the lease was not vested in it. Mr Justice Lightman's decision was upheld by the Court of Appeal  75 P&CR 8.
- Mr Neuberger QC again argued the case of Max Factor and he revived the argument that Max Factor could determine the lease at a time when the lease was not vested in it. Auld LJ held in terms that once Max Factor had assigned the lease, the break clause was, as he put it, dead. Max Factor could not therefore exercise the break because it retained nothing to which the break clause could relate. Aldous LJ said at page 15:
"Lightman J in his judgment of 13 July 1995 rejected the submission that Max Factor had the right to determine the lease at the 10 year break whether or not it was at the time the lessee. Clearly that was a right conclusion."
- Staughton LJ, who dissented in the result, also agreed in rejecting that argument. In Equinox Industrial (GP2) Ltd v Sketchley Ltd  EWHC 2 (Ch), a lease contained a break clause personal to Sketchley. It assigned the lease but subsequently re-acquired it by re-assigning it with the landlord's consent. The question before Lawrence Collins J was whether Sketchley were entitled to exercise the break. The landlords sought a declaration that the right to determine ended once and for all when Sketchley assigned the lease. Lawrence Collins J made the declaration sought.
- Mr Morgan QC (now Morgan J) argued the case for the tenant. He does not appear to have submitted that Sketchley were entitled to operate the break clause at the time when the lease was not vested in it. Thus, in all the cases in which the point could have been taken, it was only Mr Neuberger QC who had the courage to take it and it was rejected both at first instance and on appeal. Neither Etherton LJ nor Morgan J took the point. In those circumstances, it is, I think, impossible to say that Norwich Union's appreciation of the law was unreasonable.
- Step 2: Would Linpac have a case to argue that if the lease became vested in it again, it could exercise the break? As I have said, this was the assumption on which Olympia and York was argued and only the Vice-Chancellor questioned the assumption. In the Max Factor case, Staughton LJ, in his dissenting judgment, held that the right to break would be capable of revival once Max Factor re-acquired the lease. There is, thus, the legal basis for the argument and, in fact, Linpac have advanced that argument, albeit as a secondary position. Accordingly, it is, once again, impossible to say that Norwich Union's appreciation of the legal position was unreasonable.
- Step 3: If the break clauses were exercised, would Norwich Union lose a large amount of rental income which it is unlikely to be able to replace? It is common ground that it would. Step 4: Was it reasonable to refuse consent in order to avoid that undesirable change in the status quo? Linpac's desire to shed itself of its rental liability is plainly a reasonable desire but, by the same token, Norwich Union's desire to retain that rent is equally reasonable. For good measure, the Court of Appeal in Olympia and York is direct authority for the proposition that 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.
- Mr Dutton argues that it was within the express contemplation of the parties to the licence that Linpac might assign the leases and then take a re-assignment of them so as to be able to operate the break. The parties to the 1986 licences would have known that the landlord's consent would be required before there could be any assignment but in the absence of clear language to the contrary, they should not be taken to have agreed that the landlord could refuse consent for the sole purpose of preventing Linpac from operating the break. In those circumstances, a refusal of consent for that sole purpose is unreasonable.
- In support of that submission, Mr Dutton relies on First Penthouse Ltd and Channel Holdings and Properties UK Ltd  L & TR 27. The facts in that case were rather different from the facts of this case. In that case, the parties, including a chargee and the landlord, had entered into a deed of priority which gave the first chargee priority. The landlord had, in effect, agreed that the chargee had the right to sell. When the chargee came to apply for consent to sell, the landlord refused consent. In other words, the landlord was trying to stop the chargee from selling at all. Not surprisingly, it was held that having agreed the chargee could sell, the landlord was unreasonable in going back on that agreement.
- That is not this case and the basis upon which Mr Dutton advances this argument is, in my judgment, precisely the basis on which Olympia and York was argued and the Court of Appeal rejected that argument. In reality, Mr Dutton is contending for an implied term or an implied qualification to the more general language of the licence. That argument was considered and explicitly rejected by Henry LJ in the Olympia and York case. For the same reasons that the Court of Appeal rejected the argument in Olympia and York, I reject Mr Dutton's argument on this point. I conclude, therefore, that the refusal of consent was a reasonable refusal.
- Notwithstanding the refusal of consent, Ecomold, as I have said, executed a transfer of the leases to Linpac. Norwich Union, in the pleading, seeks an order undoing the effect of that transaction but it accepts that if Linpac was not entitled to exercise the break clauses, then such an order is unnecessary. I must therefore decide whether Linpac is indeed entitled to exercise the break clauses or whether that right perished when it assigned the leases to Ecomold.
- The argument has proceeded in two stages. (1) Was Linpac entitled to terminate the leases at a time when it was not the tenant in possession? (2) If not, would its right revive in the event that, having once assigned the leases, it re-acquired them by further assignment? The answer to these two questions is of course a question of interpretation of the licences. The aim of interpretation is to ascertain the meaning that the document would convey to the reasonable reader, having all the background knowledge that would have been available to the parties. In the present case, there is little, if any, factual background knowledge other than what can be gleaned from the licence and the lease itself.
- Among the most important features of the background, as things stood at the date of the licence, are (a) that the leases still had some 80 years to run, (b) that there were nearly 25 years left before the break date, (c) that the lease is assignable with the landlord's consent and (d) the tenant can underlet either in whole or in part, again, with the landlord's consent. It must have been envisaged, at least as a real possibility, that some time before the time came to exercise the break clause, Linpac would wish to assign the lease or underlet whole or part of the property comprised in the lease.
- The relevant background knowledge would also, in my judgment, include the general nature of a break clause. The break clause is an expression used to describe a right by written notice to terminate a lease on a date (usually called the break date) where in the absence of such a notice, it would endure beyond the break date. Such a right is a right that is incident to the lease or reversion, as the case may be, and in the ordinary way, passes to an assignee. In the ordinary way, the purpose of a tenant's break clause is to enable the tenant in possession to bring the relationship of landlord and tenant to an end. Again, in the ordinary way, the person entitled to exercise the right is the person in whom the legal estate is vested. Speaking of a tenant's break clause, Neville J said in Stait v Fenner  2 Ch 504:
"In my opinion, the legal estate in the term being outstanding, it was not competent for the lessee of any assignee of the lessee who had not the legal estate vested in him to give a notice."
- This is equivalent to the long-established common law about notices to quit. The language of the licence must also be interpreted in a way that makes commercial sense. Commercial commonsense is not merely a cross-check; it is an essential part of the process of interpretation. Commercial commonsense must also be considered from the perspective of both parties. Mr Dutton says that there is nothing uncommercial in Linpac bargaining for a right to break the lease at a time when it was not the tenant. It was simply the quid pro quo for its covenant to pay the rent and perform the covenants for the residue of the term.
- However, to my mind, the proposition that the lease can be terminated by someone who once was, but no longer is, the tenant in possession, makes no commercial sense at all. What landlord would agree to the prospect of his rental income being removed from him by someone who is no longer the tenant? If Mr Dutton is right, a former tenant can deprive the landlord of his income even if the tenant in possession is paying it and quite happy to pay it. Mr Dutton's submission would also apply to any case in which a lease gave a tenant a right to break and in which the lease was subsequently assigned. If a mere contractual right to break can be exercised at a time when the contracting party is no longer the tenant, any original tenant leased under an old lease for the purposes of the Landlord and Tenant (Covenants) Act 1995 would be entitled to break the lease after an assignment.
- Mr Dutton sought to escape from this by suggesting that, in the normal case, there was an ambiguity in the drafting of a break clause which had to be resolved in favour of a single person having the right to break. There are, however, in my judgment, far more fundamental commercial reasons for not acceding to the point that it is simply an ambiguity which must be resolved.
- In addition, if Mr Dutton is right, it is by no means easy to see how the right would be capable of practical implementation if the property comprised in the lease were occupied by a tenant entitled to the protection of Part II of the Landlord and Tenant Act 1954. If that tenant refused to give up vacant possession, then the break notice would be invalid with the result that there is no substantial benefit to Linpac at all. If, on the other hand, Linpac attempted to bargain with the tenant in possession to require that tenant to give vacant possession, the likelihood is that, in the absence of some very sophisticated legal thinking, any such agreement would be invalidated by section 38(1) of the Landlord and Tenant Act 1954.
- In reality, if the tenant has no more need of the premises for the purposes of its own business, it is free to sublet them, so the tenant can shift the ultimate responsibility for rent to someone else but there is no need to use a break clause for that purpose. If it sublet, it would retain the right to exercise the break clause. Moreover, if the purpose of the break clause is simply to obtain Linpac's release from liability, there was ample precedent in clause 3 of the licence for the draughtsman to deal with a release from liability in that way just as he released the original tenant and the assignee.
- Although it would, I accept, be theoretically possible to create a fixed term lease capable of termination by someone who was neither the landlord nor the tenant, it would be an extraordinary, if not a unique creation. Thus, I agree respectfully with Lightman J at first instance in the Max Factor case that:
"The clearest language would be to 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."
- Mr Dutton argues that the language of a licence should be given its natural meaning. First, he says, the only thing in clause 5 of the licence that identifies who may give the notice is the use of the expression "the assignee". There is nothing in the ordinary meaning of the word "assignee" to connote continued ownership of the property and it is therefore impermissible to use the word so as to introduce a condition that Linpac must not merely have taken the 1986 assignment but must not have made any subsequent assignment itself.
- Second, he says that the expression "the assignee" is used in several places within the licence including clause 2 as well as clause 5 and that there is no reason to believe the expression is intended to bear a different meaning in different parts of the licence. The purpose of clause 2 was to impose on Linpac an obligation to pay the rent, not merely while the term of the lease remained vested in it, but throughout the contractual period of the term, even after any further assignment by Linpac. Indeed, it is precisely that contractual obligation that Norwich Union rely on in continuing to claim rent from Linpac.
- Accordingly, he says, in clause 2 in the licence "assignee" simply means "Linpac". It follows therefore that there is no additional limitation imposed on clause 5, namely that Linpac would only be "the assignee" while the term remains vested in it. He says it follows from this that Linpac is entitled to terminate the term whether or not it is the tenant in possession. I do not accept these submissions, largely for the reasons given by Mr Rodger QC.
- First, the natural meaning of "assignee" is a person to whom the lease has been assigned and in whom it remains vested. In the present case, this is reinforced by the use of the definite article. Linpac is not simply "an assignee" which might be apt to include someone who is one of many people to whom the lease had been successively assigned but is "the assignee". Second, in clause 5, Linpac is not only identified by name. It is identified by status, that is to say its status as assignee.
- Third, if Linpac desires to terminate the lease, the clause requires that notice be served upon the landlord 18 months before the break date. There is no requirement to serve notice on the tenant in possession. If the break clause has the effect that Linpac can terminate the tenancy of the tenant in possession without his knowledge, this omission is astonishing. Fourth, the other break condition which must be satisfied by the assignee points towards Linpac being the person who satisfies those conditions.
- The first proviso requires, as a condition of exercise of the break, that the assignee has paid the rent and performed the covenants up to the date of termination. As a matter of interpretation, this can only be that Linpac has paid the rent and performed the covenants. Mr Dutton submitted that payment by a third party (for instance, the tenant in possession) be discharged Linpac's liability. No doubt that it so but it does not, in my judgment, meet the point. It is not an obligation; it is a condition.
- Mr Dutton also submitted on the authority of Bass Holdings Ltd v Morton Music Ltd  1 Ch 493 that the condition would be satisfied if there were no subsisting breaches at the termination date. Again, that may be so but, again, I think it misses the point. The point is not what would amount to performance of covenants but whether the fact that the assignee is required to satisfy the condition is a pointer to the conclusion that the right to break was not intended to survive further assignment by Linpac. In my judgment, it is. The decision in Bass Holdings turned on the practical impossibility of satisfying the condition if it were literally construed. No such difficulty arises in the present case if the assignee in the first proviso means what it said.
- Moreover, consideration of the commercial background which I have described points decisively against Mr Dutton's argument. In addition, as Mr Rodger pointed out, once Linpac has assigned the lease, any effective exercise of the break clause would require the co-operation of the tenant in possession in order to make the exercise effective even if only by the giving of vacant possession. In practice, therefore, Linpac could not exercise the break unless the tenant in possession agreed to the exercise; but according to its express terms, the break can be assigned by Linpac only and not by Linpac in conjunction with someone else.
- The same point can be looked at from the other end of the telescope. It cannot have been intended that an assignee from Linpac would have an indirect right to break by securing Linpac's co-operation in serving a notice so as to enable the assignee to perfect the notice by performing the conditions. After all, once Linpac has assigned the lease, it had no reason for withholding its co-operation.
- In addition, Max Factor, both before Lightman J and in the Court of Appeal, is authority against Mr Dutton's argument. It is true that the precise effect of the written instrument turns on the language of the instrument itself but when a clause such as a personal break clause is one of a family of such clauses, the reasonable reader naturally expects a family resemblance. In the commercial and property world, certainty is of prime importance. The parties ought to be able to know where they stand without having to come to court and spending tens or hundreds of thousands of pounds to find out. For the court to reach radically different results based on the detailed nuances of language in slightly differently worded clauses does the law no credit.
- The history of litigation of rent review clauses illustrates the point. It took a decision of the House of Lords to sweep away the distinction between so-called option clauses and so-called machinery clauses. It took four decisions of the Court of Appeal finally to settle the question of whether deeming clauses made time of the essence. The property world was in a state of uncertainty for decades. Indeed in Bass Holdings itself, Nicholls LJ said:
"Of course, questions of construction depend upon the particular language of the particular instrument, but this is a field in which the court should be slow to find that small, inexplicit differences in language lead to a clause being construed, contrary to the norm."
- I am not prepared to distinguish Max Factor in this respect. In the case of unit 8, there is the additional point that clause 6(5) says that the notice can only be given by Linpac as original tenant. Once Linpac assigned the lease, it ceased to be a tenant of any kind. Mr Dutton said that "original tenant" was conventionally used at the time to mean "the contracting party after he had parted with his interest". If that argument is right, then on the particular language of the clause, it must equally apply to any associated company of Linpac who would have the right to terminate the lease. That, to my mind, is an astonishing result. In my judgment, the phrase "as original tenant" means that Linpac can only operate that break clause if (a) it is the tenant and (b) it remains the tenant without further assignment. I hold, therefore, that the break clauses were not capable of exercise by Linpac at a time when it was not a tenant in possession.
- That leads on to the second part of the question. If Linpac could not exercise the break clauses while it was not the tenant in possession, could it exercise them once it had re-acquired possession or was it right irretrievably lost when it assigned to Ecomold? Mr Dutton candidly accepted that this would be a very unusual result and it was very much his fallback position. In the Equinox case, Lawrence Collins J said:
31. I therefore accept the contention of the Claimants that there is commercial sense in an arrangement under which a right, such as a right to determine a lease, is available to the original lessee but which ends should that lessee choose to assign the lease. The original lessee then has two options. It can retain the benefit of the lease and enjoy the special personal right conferred on it or it can realise the value of the lease by assigning it but recognising that the special personal right is then no longer operable so that any price for the assignment will not reflect this right. What is less commercially intelligible is an arrangement under which the original lessee can assign the lease but then hope or expect that it can still exercise the special right if at some appropriate date in the future it re-acquires the lease. If the right can be revived there is inevitably a measure of continuing uncertainty involved. Such a position would be obviously unattractive to a landlord especially if it intends to transfer the reversion, and the same uncertainty would affect any purchaser of the reversion.
32 The construction contended for by Sketchley Ltd would be of very doubtful commercial benefit to a tenant. If Sketchley Ltd is correct the right to determine the lease can be revived by an assignee re-assigning the lease to the original tenants (as it says has occurred in this case). Yet the landlord could prevent the revival of the right by refusing consent to the proposed re-assignment, and in doing so would be acting reasonably: Olympia & York. Both Auld LJ and Aldous LJ in Max Factor  2 EGLR 210 at pp 212 and 214 relied on this point in concluding that re-assignment did not revive the right. Nor do I consider that it makes a difference to this conclusion (as Mr Morgan QC contended for Sketchley Ltd) that the court has a power to make a vesting order in favour of the original tenant under section 181(2) of the Insolvency Act 1986. The court has a discretion, and the landlord could object to an order unless the original tenant gave an undertaking not to operate the break clause."
- I find that reasoning compelling. In the present case, there is no commercial sense in attributing to the parties an intention that the right should revive if Linpac should re-acquire the lease. If Linpac wish to retain the right to break, the remedy was in its own hands. It could have sublet the property instead of assigning the lease. That was the conclusion Lightman J reached in the Max Factor case and his reasoning was expressly approved by Auld and Aldous LLJ on appeal. For the reasons I have given, I consider that I ought to follow Max Factor and Equinox despite the small differences in wording between members of the same family of personal break clauses. I hold, therefore, that Linpac is not entitled to exercise the break clauses even if and when it re-acquires the leases.
- In the result, therefore, I conclude that Norwich Union reasonably withheld its consent to the assignments to Linpac even though, ultimately, its fear of Linpac actually being able to exercise the break clauses turned out to be unfounded; and that Linpac's right to break the leases was irretrievably lost when it assigned the leases and it cannot exercise the break clause even if the legal estate now becomes vested in it.
Copyright Policy |
Donate to BAILII