- Effect of dilapidations settlement on break clause.
- Tenant's right to break passing on assignment
Effect of a dilapidations settlement on a break clause
 EWCA Civ 7
The Court of Appeal has held that a compromise agreement settling a dilapidations claim deprived the landlord of the right to rely upon the conditions of a break clause. Thus, although T failed to leave on the break date, the break notices were still valid, and the lease had come to an end.
T had the benefit of a break option to determine the lease on 30 December 2004 upon giving not less than 6 months notice in writing to the landlord, and conditional upon:
- "the Tenant [having] paid the yearly rent reserved by this Lease and substantially performed and observed the Tenants' material covenants up to the date of expiry of the notice"
and further conditional upon the tenant delivering up the premises by the break date.
The landlord served a schedule of dilapidations after the tenant had exercised the break option. The parties then entered into a settlement agreement pursuant to which the tenant paid a substantial sum of money to the landlord in consideration of the landlord releasing the tenant "absolutely from its liabilities, covenants and obligations past and present under the Lease so far as the same relate to state and condition of the Premises." The tenant also covenanted in the settlement agreement to keep the premises in no worse state than they were in on the date when a schedule of condition was prepared.
Unfortunately, the tenant did not vacate the premises by the break date and the landlord brought proceedings contending that the lease was still in existence because the tenant had failed to comply with the conditions for exercising the break option - namely it remained in occupation.
At first instance, Lewison J. held that the effect of the settlement agreement was that the landlord had waived the right to rely on the remaining conditions of the break clause in order to defeat the notices already served. He applied the "officious bystander" test:
- "Suppose that such a bystander had asked the parties: is it the case that the tenant could choose not to vacate but to remain in occupation for a further seven years without any obligation about the state and condition of the premises apart from the obligation to keep them in no worse condition than that in which they were in August 2004? In my view both parties would have said "of course not". We have agreed that the leases have come to an end as a result of the notices. That is why the tenant has agreed to pay the landlord a sum which has been calculated on that basis and which would not have been payable in any other circumstances."
The landlord's appeal to the Court of Appeal was dismissed by a 2:1 majority. Sir Anthony Clarke MR, agreeing with Lewison J's approach held that it was necessary, in order to give business efficacy to the settlement agreement, to imply into it a term to the effect that the leases would come to an end regardless of whether the tenant vacated by the break date. The landlord would be entitled to damages for failure to deliver up at the expiry of the lease but such failure would not render the exercise of the break option ineffective.
Lord Justice Sedley, on the other hand, whilst agreeing the appeal should be dismissed held that, as a matter of construction, the effect of the express terms of the agreement was that the break notice would take effect irrespective of the provisions of the break clause. He felt no need to imply any terms into the settlement agreement to achieve that. Failure to yield up on the due date would entitle the landlord to damages in trespass but would not affect the validity of the exercise of the break option.
Dissenting, Lloyd LJ did not consider that the settlement agreement waived the requirement by the tenant to vacate on the due date for the break notices to be effective. He disagreed with Lewison J's answer to the question asked by the officious bystander, maintaining that the tenant may well have answered in the affirmative, but there was "no reason to suppose that the landlord would have done so".
Tenant's break right - benefit passing on assignment
 EWHC 1746 (Ch)
Tenants break clause expressed to be personal to the original tenant, but the lease also provided that the benefit of the right to break could be assigned to a group company. The lease was assigned to another company in the group but without expressly assigning the benefit of the break right. The assignee exercised the right to break but the landlord objected on the ground that the benefit had not been expressly assigned.
The benefit of the break right passed automatically on the assignment of the lease by virtue of section 63 LPA 1925, which provides that a conveyance passes all the estate, right, title, interest, claim, and demand which the conveying parties respectively have, in, to or on the property conveyed. The break right in this case was not wholly personal and did touch and concern the land.
It would obviously still be better to avoid the problem arising in a similar case in the future by expressly assigning the benefit of the break right.
Right of original tenant to break after assignment
Linpac Mouldings Limited v Aviva Life and Pensions UK  EWCA Civ 395
In the absence of clear wording to the contrary, an "original tenant only" break option does not remain capable of being exercised by the original tenant after assignment of the term.
This dispute centred on break options granted to the claimant, Linpac Mouldings (C). The right to break concerned 3 leases, two dated 1972 and one dated 2005. The right to break the 1972 leases was contained in a licence:
- “...if the Assignee (meaning Linpac Mouldings Ltd only) shall desire to determine the Lease...”
and was expressed to be exercisable only if the 2005 lease could be broken. The 2005 lease limited the break right to “the Tenant” and continued:
- “references to “the Tenant” mean Linpac Mouldings Limited as original tenant...”
Lewison J held that, in the absence of clear wording to the contrary, an "original tenant only" break clause:
- Did not ‘revive’ on assignment back to the original tenant; and
- Was incapable of being exercised by the original tenant once it had assigned the term.
The first point was not pursued on the appeal by C.
Following assignment by the original tenant of the term, did an "original tenant only" break clause remain capable of being exercised by the original tenant even though it was no longer the tenant under the lease?
The Court of Appeal held that a break option expressed to be for the benefit of an original tenant only was not capable of being exercised by the original tenant after it had assigned the term of the lease to a 3rd party. Etherton LJ said that, amongst the reasons for dismissing the appeal and upholding the first instance decision were:
- That documents are to be interpreted “to give effect to the intention of the parties to be ascertained in the light of the commercial purpose and context of those documents and the factual setting known to the parties".
- A right to end a lease is, generally, an incident of the landlord and tenant relationship.
- The possibility that a former tenant could bring a lease to an end “would be extraordinary, even if technically possible” because, amongst other things, of problems with the Landlord and Tenant Act 1954 and the more straightforward way for the tenant to retain the break right by simply sub-letting, rather than assigning.
- The number of cases which have upheld this position – which commercial lawyers would have considered in drafting the rights
- The desirability of retaining some degree of predictability in the interpretation of leases.
Etherton LJ held that the reference in the 2005 lease break clause to “Linpac Mouldings Limited as original tenant...” meant that:
- “Linpac is only able to exercise the right to determine the 2005 Lease "as original tenant", that is to say in its capacity as and so long as it is the tenant. It seems to me, with respect, impossible to argue that the words "as original tenant" are terms of art which denote the first tenant, whether or not it remains the tenant.” (para 50)
Sedley LJ agreed with the decision, but with misgivings. His concerns centred on the terms of the leases: for 99 years and 65 years, at full rack rent with one break right available to the original tenant to bring the leases to an end in 2010. He could see an argument that Linpac should be capable of being able to exercise the break right, regardless of whether it was the tenant at the time:
- “I do not find it odd that a party which had ceased to be the tenant should have been empowered to do this. As assignor of the term, Linpac remained liable on the covenants and so had a continuing and important interest in the break clause. There may have been no surviving privity of estate, but there was continuing privity of contract.” (para 62)
However, he ultimately held that the commercial and legal background against which the lease was made supported the conclusion reached by Etherton LJ:
- “Even so, on what I accept is the correct construction of the 2005 lease, Linpac, by assigning the term, have put it out of their power to break it. Whether this outcome was intended (there has been no claim for rectification) or simply not addressed we do not know. But it is what the lease says – or at least what it means. The result is that Linpac remain liable until 2070 for an annual rackrent on premises which they neither occupy nor have any use for.” (para 65)
In drafting terms, it is always preferable to add a proviso to the effect that the break option lapses on an assignment by the original tenant.