Tenant breaks: This time it’s personal

The message: Tenants must be careful not to lose the right to break their leases

The case: The Court of Appeal has decided whether a tenant lost the right to break onerous leases when it assigned them (Linpac Mouldings v Aviva Life & Pensions UK, 22.04.10).

In 1986, Linpac took an assignment of two leases of various units on an industrial estate in Southend. Each of the leases was for 99 years from 1971 and the rent is subject to upward-only reviews every seven years. The total rents payable are £550,000 a year.

When it took the assignment, Linpac agreed to pay rent and observe the covenants for the rest of the term of the leases. However, it negotiated a break at 1 December 2010, subject to satisfying conditions such as giving up vacant possession by the break date and paying the landlord two years’ rent. This right was personal to Linpac.

In 2005, Linpac took a 65-year lease of another unit and this again included a break at 1 December 2010, subject to the other two leases also being terminated simultaneously. Shortly thereafter, all three leases were assigned to an associated company, which ceased to be a member of the same group and became insolvent in May 2005. All units have remained empty ever since. Linpac is liable to pay the landlord all sums due under the leases.

In an effort to put an end to its very substantial liabilities under the leases, which may otherwise continue until 2070, Linpac purported to serve notice on the landlord, Aviva, in 2009 to determine the leases on 1 December 2010. It claimed that, even though it was no longer the tenant, it could still exercise the right to break the leases.

Aviva obtained a court declaration that Linpac had lost its right to break by assigning the leases and that it could not recover these rights by taking any assignment back. Linpac appealed on the basis that all the leases were highly unusual and very onerous because they provided for payment of a market rent for many years and that, accordingly, the right to break was intended to be operable by Linpac throughout the term of the leases, rather than being restricted to only being exercised while Linpac was the tenant.

It was Linpac’s case that there were no words in any of the documentation that said it had to be the tenant to be able to break the leases but the Court of Appeal agreed with the judge that it would be a nonsense if the break could be exercisable by Linpac when it had already vacated the premises. There would be all sorts of practical difficulties if another tenant was in occupation, given the requirement imposed by the break clauses that vacant possession had to be given on the break date.

No uncertain terms

The court took particular note of the fact that a right to break a tenancy is an incident of the relationship of landlord and tenant. The right would ordinarily pass from one tenant to another on an assignment and be exercisable by the party who was the tenant at the time. The court noted that all the previous case law was to this effect and held that it was important that the court did not create uncertainty by interpreting break clauses in commercial leases in radically different ways.

Given how unusual any break clause would be if it could be exercised by a previous tenant, the court said that very clear wording would have been necessary to achieve this result.

The court further noted that the 2005 lease stated that Linpac could only exercise the break “as original tenant” and therefore made it quite clear that this was only so long as it was the tenant.

Accordingly, the court unanimously dismissed the appeal and Linpac remains liable under all three leases. Why it was not advised to sublet the premises in 2005, rather than assigning them, to preserve its right to break, is a mystery but may now be the basis for yet further litigation.

Summing up: Linpac Mouldings v Aviva

• Linpac assigned three leases where it — and only it — could exercise the break clauses.
• Aviva said the assignment meant that Linpac could no longer exercise these breaks.
• The judge agreed with Aviva. Linpac should have sublet instead.