Personal Break Clauses and Lease Assignments
The recent case of Norwich Union Life and Pensions v Linpac Mouldings Ltd concerned the issue of personal break clauses and demonstrates how the rights to a break clause can be lost when the Lease is assigned to another tenant.
Norwich Union owned an industrial estate in Southend-on-Sea. It leased premises to Linpac Mouldings Ltd (Linpac). The lease contained a break clause that was expressed to be personal to Linpac. Linpac assigned the lease to one of its group company Ecomold which subsequently went into administration.
Ecomold then applied to Norwich (the Landlord) to obtain it’s consent to re-assign the lease back to Linpac.
Norwich refused giving consent knowing there was a risk that Linpac would exercise it’s rights to a break clause and terminate the lease, to the landlord’s disadvantage for loss of rent.
Ecomold assigned the lease without the landlord’s consent. It then tried to exercise it’s right to the break clause.
The High Court decided the following:
- Could Linpac exercise the break clause, after it had assigned the lease to Ecomold, but before it re-assigned the lease back to itself?
- Could Linpac exercise the break clause after the lease had been re-assigned to it?
- Did the landlord unreasonably withhold the consent to re-assignment of the lease?
- a) The Court held that the break clause provisions had to be interpreted in accordance with commercial common sense. To say that a lease could be terminated by someone who once was, but no longer is, the tenant in possession made no commercial sense. This would allow former tenants to terminate the lease enjoyed by a current tenant! The court ruled against Linpac on this issue.
- b) The Court held that there was no commercial sense in attributing to the parties an intention that the right should revive if Linpac re-acquired the lease. Again the Court ruled against Linpac on this issue.
- c) It was held 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. On that basis, the landlord’s appreciation of the legal position, and its refusal of consent, was not unreasonable and this was the case regardless of the fact that Linpac’s claim to exercise it’s right to a break clause was unfounded. Again the Court ruled against Linpac on this issue.
The case highlights the importance that a personal break clause can be lost where the lease is assigned, and that it right cannot be resurrected it the lease is re-assigned back to the original tenant. Where a tenant enjoys a personal break clause, it is worth considering sub-letting the property so that the right to the break clause can continue.