Linpac Mouldings Ltd & Ors v Aviva Life and Pensions UK Ltd

Mr Christopher Nugee QC, for Linpac, emphasised that the 1972 Leases are unusual commercial leases and highly onerous, in that they are for a term of 99 years at a rack rent. What is clear from the 1986 Licence, and understandable, is that Linpac was only willing to take an assignment of the 1972 Leases with the benefit of a right to break them.

Mr Nugee submitted that the fundamental error of the Judge was to find that Linpac’s right to determine the 1972 Lease pursuant to clause 5 of the 1986 Licence was subject to a proviso, condition or limitation which is not stated. Mr Nugee pointed out that the description of Linpac in the introduction to the 1986 Licence contains no reference to its successors in title or assigns. The Judge, he said, interpreted the opening words of clause 5 as if they referred only to such time as Linpac should be the tenant under the Lease, drawing a distinction between such time and any period after Linpac should have parted with the Lease, but clause 5 simply did not state that. Mr Nugee criticised the Judge for failing to take adequate account of the onerous nature of the 1972 Leases, which Linpac was proposing to acquire, and that, unusually, the right to break was contained in a licence to assign rather than the lease itself. Clause 5 plainly made the right to break personal to Linpac, and so unassignable, but Mr Nugee said there is no proper basis for interpreting the clause as subject to a further restriction that it can only be exercised while Linpac itself is the tenant and prior to any assignment by Linpac.

Mr Nugee said that, in the case of a tenant’s break clause in a lease, which creates a relationship of landlord and tenant, it is understandable that the right to determine granted to the tenant should, in ordinary circumstances, be confined to the tenant from time to time. He submitted that the same is not true of a right to determine granted to an assignee in a licence to assign; and he criticises the view expressed by the Judge in paragraph [53] of his judgment that the natural meaning of “assignee” is a person to whom the lease has been assigned and in whom it remains assigned, and that, by defining Linpac in the 1986 Licence as “the Assignee” [emphasis added], the parties were intending to identify Linpac in clause 5 by its status as assignee, that is to say if and so long as it should remain the assignee in which the 1972 Lease was vested. Mr Nugee submitted that Linpac was the person to which the assignment was to be, and was, made, and it did not cease to be “the Assignee” when it assigned on the 1972 Lease.

The Judge was quite wrong, Mr Nugee submitted, to regard Linpac’s literal interpretation of the actual words of clause 5 as making “no commercial sense at all”. In the first place, the Judge, he said, failed to take proper account of commerciality from Linpac’s perspective. I have already referred to the unusual and onerous terms of the 1972 Leases. At the time of the 1986 Licence, the break date under clause 5 was still 24 years away. There was, Mr Nugee submitted, nothing uncommercial about the guarantee to the landlord of 24 years of rent, while conferring on Linpac, whether or not it was then the tenant, the right to break the 1972 Leases at the end of that 24 year period. He said that there was, in any event, no evidence at all about whether the parties even contemplated that there was likely to be an assignment by Linpac during that period; and indeed, bearing in mind the industrial nature of the premises, it was quite possible that the parties did not envisage that there would be an assignment during that time.

Mr Nugee also criticised the Judge’s reliance on complications arising from the security of tenure conferred by the 1954 Act if the right to determine under clause 5 of the 1986 Licence is to be exercised at a time when a tenant other than Linpac is in occupation of the demised premises. He accepted that, unless the tenant was willing to vacate the premises, it would be impossible for Linpac to comply with the requirement of clause 5 to give the landlord vacant possession, and any such agreement by the tenant would, as the legislation provided in 1986, only be valid if approved by the Court in accordance with section 38 of the 1954 Act. He submitted, however, that it was unlikely that the subtlety of that problem would have been appreciated by the parties to the 1986 Licence or those advising them. Furthermore, he emphasised the ability of Linpac to deliver vacant possession was not a problem to be dealt with in the 1986 Licence. It was a matter for Linpac itself, to be dealt with in negotiations between itself and any assignee, just as, if Linpac had underlet, the obtaining of vacant possession would have been a matter between it and the sublessee. The Judge was also wrong, therefore, Mr Nugee submitted, to take into account, against Linpac, that there is no provision in clause 5 for any notice to be served on a tenant which took an assignment from Linpac.

Mr Nugee also criticised the Judge’s reliance on the first proviso to clause 5 which requires, as a condition of the exercise of the break, that the assignee has paid the rent and performed the covenants up to the date of termination. The Judge said that, as a matter of interpretation, that must be a requirement that Linpac itself has paid the rent and performed the covenants. Mr Nugee submitted that the Judge ought properly to have taken into consideration, on this aspect, that any payment of rent and performance of the other obligations of the tenant by an assignee from Linpac would to the same extent automatically discharge Linpac; that the proviso ought properly to be regarded only as requiring that Linpac pay rent and comply with the tenant’s covenants from service of the break notice until determination of the 1972 Lease (as stated by Staughton LJ in Max Factor at p.10); and that the proviso is properly to be interpreted, in accordance with Bass Holdings Ltd v Morton Music Ltd [1988] Ch 492, as requiring only that at the relevant date, that is to say 1 December 2010, there be no subsisting breach or outstanding and unsatisfied claim for breach of covenant.

Finally, Mr Nugee submitted that the Judge was wrong to refuse to distinguish Max Factor. While Mr Nugee acknowledged the general principle that it is undesirable, in this area, that fine distinctions of language should lead to different legal consequences, he submitted that it is a material and important difference between the present case and Max Factor that the right to break in that case was conferred on the tenant by the lease itself, whereas Linpac’s right to determine is conferred by a licence to assign an unusually long and financially onerous lease, in which licence Linpac has entered into a direct contractual obligation to pay the rent and observe and perform the tenant’s covenants and conditions for the remainder of the term.

As mentioned earlier, the 2005 Lease is also unusually long, and contains provision for seven yearly upwards-only rent reviews to rack rental value.

So far as concerns the 2005 Lease, Mr Nugee rested Linpac’s case entirely on the provisions of clause 6.5. His brief submission was that the definition in clause 6.5 of “the Tenant” as “Linpac Mouldings Limited as original tenant”, for the purposes of clause 6, means that Linpac is entitled at any time to exercise the right to determine since it always remains “the original tenant” even after it has parted with the Lease. He referred to Centrovincial Estates plc v Bulk Storage Ltd [1983] 2 EGLR 45 (Harman J) as one example of many cases in which the expression “original” tenant has been used, even after assignment of the lease, to describe the person to whom the lease was originally granted. Linpac’s skeleton argument refers, in this regard, to the following further cases: Allied London Investments v Hambro Life Assurance [1984] 1 EGLR 16 (ChD) at 17; Guys’n’Dolls v Sade Bros [1984] 1 EGLR 103 (CA) at 105; Selous Street Properties v Oronel [1984] 1 EGLR 50 at 56; Hus Chaio Commercial Bank v Chiaphua Industries [1987] AC 99 (PC) at 108B-C; and Kumar v Dunning [1989] QB 193 (CA) at 201A-B.

At the end of the day, and despite the number and sophistication of the arguments deployed by the parties and discussed by the Judge, the appeal raises two short questions of interpretation. Notwithstanding Mr Nugee’s characteristic skilful advocacy, I have no hesitation in rejecting the grounds for appealing.

The following considerations are to be borne in mind in approaching the question of interpretation on this appeal.

First, the 1986 Licence and the 2005 Lease are, in the usual way, to be interpreted so as 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.

Secondly, in the ordinary way the right of a landlord or a tenant to bring a tenancy to an end by notice is an incident of the relationship of landlord and tenant. As the Judge observed, that is the common law position in relation to notices to quit in respect of a periodic tenancy: see, for example, Woodfall on Landlord and Tenant Vol 1 para 17.229 and Wordsley Brewery v Halford (1903) 90 LT 89 (notice to quit invalid when served by the original lessor who had, prior to the service of the notice, granted a concurrent lease). In the same way, the benefit and burden of a break clause in a lease will ordinarily pass with the reversion or the term, as “touching and concerning” the respective estates of the landlord and the tenant and as conditions of the enjoyment of those estates: Harbour Estates Ltd v HSBC Bank PLC [2004] EWHC 1714 (Ch), [2005] Ch 194; City of London Corporation v Fell [1993] QB 590, 603; Stait v Fenner [1912]Ch D 504.

Thirdly, provision for a former tenant to bring a lease to an end at a time when the lease is not vested in them would be extraordinary, even if technically possible. It would be extraordinary, not merely because of the ordinary position as I have just described it, but because of the difficulties of obtaining vacant possession from the business tenant entitled to the benefit of the security of tenure conferred by the 1954 Act, the improbability of the landlord or any assignee from the tenant being content to accept such a provision, and the availability of a more obvious and straightforward route to achieve the same practical end by the tenant subletting rather than assigning. It is not surprising, in the light of such considerations as these, that Lightman J and the Court of Appeal in Max Factor gave very short shrift to the argument of Max Factor that it could exercise the right to determine even at a time when the lease was not vested in them.

Fourthly, there have been a number of cases since 1994, which would be well known to commercial property lawyers, in which the Court of Appeal has considered the operation of a tenant’s right to break the lease where the break provisions have limited the right to the original tenant and the original tenant has assigned the lease: see, for example, Olympia & York, Max Factor,Brown & Root Technology Ltd v Sun Alliance and London Assurance Co Ltd [2001] Ch 733, and Equinox. They have highlighted, and would have alerted commercial property lawyers to, possible complications arising from such clauses in such circumstances. In none of them, nor in any other reported case, has the Court ever interpreted a contractual provision as conferring on a person a right to break a lease at a time when they are neither the landlord nor the tenant.

Fifthly, for all those reasons it would be reasonable to expect, both before and after the cases just mentioned, that competent property advisers would take particular care to make unambiguously clear, if intended, that a person will be entitled to break a lease not only when they are the tenant, but even after they have assigned the lease.

Sixthly, although it must never be forgotten that the object of all interpretation is to identify the intention of the parties to the particular document in question, I agree with Lewison J that it is undesirable that the courts should reach radically different interpretations of break clauses in commercial leases based on slight differences in language which are not obviously intended to achieve different objectives.

Against the background of those general considerations, I turn to consider the 1972 Leases and the 2005 Lease.

I shall start with the 2005 Lease since, despite Mr Nugee’s able submissions, I do not consider Linpac’s case on the interpretation of clause 6 of that Lease to be seriously arguable. The terms of clause of 6.5, far from assisting Linpac, make it expressly clear 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. That is also borne out by the remainder of clause 6.5 which includes within the references to “the Tenant” in clause 6 any company forming part of the same group as Linpac. Mr Nugee valiantly sought to argue that it is sufficient if any one of such companies, at any time, whether or not it is the tenant under the 2005 Lease, serves a notice under clause 6 to bring the 2005 Lease to an end. That interpretation would, however, mean that the words “as original tenant”, which qualify the reference to Linpac, would be otiose. Moreover, there would appear to be no commercial reason for enabling a number of different entities to have a concurrent power to bring the 2005 Lease to an end. Furthermore, set against the background of the cases to which I have referred in paragraph [46] above, and the usual approach in paragraph [44] above, it would be very surprising indeed if the parties had intended, by the wording of clause 6.5, to achieve the extraordinary result for which Linpac contends. Far from making such an intention unambiguously clear, the parties have spectacularly failed to make that purpose clear at all.

By contrast, clause 6.5 can be read fairly and naturally in a manner consistent with the conventional approach, as restricting the right to break to Linpac and its associated companies during such time as they should respectively be the tenant under the 2005 Lease. The fact that, as was pointed out by Mr Nugee, there was a licence to assign from Linpac to Automotive, an associated company, on the same day as the 2005 Lease and that the 2005 Lease was virtually immediately assigned to Automotive is not (contrary to his submission) in any way inconsistent with that interpretation.

For those reasons, it is not possible for Linpac to operate the provisions of clause 6 to bring the 2005 Lease to an end. It is not possible, therefore, for Linpac to operate the right to break the 1972 Leases since it cannot satisfy the amended proviso (iii) to clause 5 of the 1986 Licence. For practical purposes, therefore, that is the end of the appeal. I shall, nevertheless, address briefly the position of the 1972 Leases in deference to the arguments of counsel.

The considerations I have set out in paragraphs [43] to [48] above lead inevitably to the rejection of Linpac’s interpretation of clause 5 of the 1986 Licence. The words and qualification – “if the Assignee (meaning Linpac Mouldings Limited only)” – are far from being unambiguously clear that Linpac is to be entitled to determine the 1972 Lease even if it has previously assigned the Lease. They are easily capable of being read consistently with the usual and orthodox approach that a break clause is an incident of the relationship of landlord and tenant. Indeed, that was the very way similar words were interpreted in Max Factor. The words, in the light of those in parenthesis, reflect more naturally an intention to limit rather than to expand what would otherwise be the conventional position that a tenant’s right to break is exercisable only by the tenant for the time being and, on assignment, passes to the assignee. I agree with Lewison J that there is no sound reason for distinguishing the legal effect of the critical words differently from the similar words in Max Factor, and good reasons of policy and principle for not doing so.

In my judgment, Mr Nugee’s submissions place far too much weight on clause 5 being in a licence to assign rather than a lease. The 1986 Licence was intended to govern relations between Linpac and NU if and when, as was intended, the 1972 Lease was assigned to Linpac, and I can see no proper commercial or legal justification for treating the effect of the critical words in clause 5 differently in the 1986 Licence than if they had been inserted in the 1972 Lease itself by way of variation of its provisions. That is the short answer to Mr Nugee’s emphasis on the onerous liability that was being taken on by Linpac by taking an assignment of the 1972 Lease.

Furthermore, I cannot agree with Mr Nugee that the parties to the 1986 Licence may not even have contemplated an assignment prior to the break date in 2010. The very fact that they qualified the reference to the Assignee in clause 5, by expressly limiting it to Linpac, was to meet the situation in which there was an assignment by Linpac. The fact that the provisions of clause 5 do not appear to recognise, or grapple in any way with, the legal and practical difficulties likely to arise from any attempt to obtain vacant possession from an assignee from Linpac is a significant indication that Linpac’s interpretation is not what was intended.

I should record that other arguments in opposition to the appeal were advanced by Mr Martin Rodger QC, for NU, in his able submissions, but I do not consider that they carry the weight of the ones I have mentioned and it is not necessary to address them. Similarly, I do not consider it is necessary to rely upon other matters which the Judge considered supported his conclusions.

For those reasons I would dismiss this appeal.

I agree that this appeal should be dismissed for the reasons given by Etherton LJ.

With some misgivings, I agree that this appeal fails.

The 1972 lease and the licence to assign it are remarkable in more ways than one. Extraordinarily for a 99-year lease, this one is not executed for a premium at an annual ground or peppercorn rent: it binds the tenant for effectively a century to pay a full rackrent, with no means of escape short of insolvency or dissolution. The sole possibility of relief for the tenant was a one-off opportunity to break the lease in 2010. Linpac secured this on taking an assignment of the lease. It was to NU’s advantage to have a solvent tenant paying a guaranteed market rental for at least the next 25 years, and to Linpac’s advantage to know that if necessary it could break the lease at that point.

By the time the date for breaking the lease came round another assignee was in possession. That might well have made it harder for Linpac to give vacant possession, but it was by no means impossible. If Linpac could reach an acceptable arrangement with Ecomold – and it would have been worth paying well for it – vacant possession could be given. There was no possibility of Linpac giving an effective notice simply to get rid of their surviving obligations under the lease at their own assignee’s expense.

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.

Thus far, therefore, I would go along with Mr Nugee’s argument. The obstacle to it, however, is the wording of clause 6.5 of the 2005 lease. While it is, I think, possible to understand the words “as original tenant” as meaning that Linpac, being the initial tenant, are to have a continuing right to determine the lease, for the reasons explained by Etherton LJ the commercial and legal background against which the lease was made supports the meaning relied on by Mr Rodger: that the right is to vest in Linpac so long as it remains the tenant.

In relation to the 1972 lease I would, however, add a respectful caveat about relying on the construction of one document in construing another. As Sir George Jessel MR said in Aspden v Seddon (1875) L.R. 10 Ch. App. 394, n.1:

“No Judge objects more than I do to referring to authorities merely for the purpose of ascertaining the construction of a document; that is to say, I think it is the duty of a Judge to ascertain the construction of the instrument before him, and not to refer to the construction put by another Judge upon an instrument, perhaps similar, but not the same. The only result of referring to authorities for that purpose is confusion and error, in this way, that if you look at a similar instrument, and say that a certain construction was put upon it, and that it differs only to such a slight degree from the document before you, that you do not think the difference sufficient to alter the construction, you miss the real point of the case, which is to ascertain the meaning of the instrument before you. It may be quite true that in your opinion the difference between the two instruments is not sufficient to alter the construction, but at the same time the Judge who decided on that other instrument may have thought that that very difference would be sufficient to alter the interpretation of that instrument. You have, in fact, no guide whatever; and the result especially in some cases of wills, has been remarkable. There is, first, document A., and a Judge formed an opinion as to its construction. Then came document B., and some other Judge has said that it differs very little from document A.— not sufficiently to alter the construction— therefore he construes it in the same way. Then comes document C., and the Judge there compares it with document B., and says it differs very little, and therefore he shall construe it in the same way. And so the construction has gone on until we find a document which is in totally different terms from the first, and which no human being would think of construing in the same manner, but which has by this process come to be construed in the same manner.”

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.