Exercising break clauses

Can an estoppel prevent a Landlord from exercising a break clause? The case of Crossco No. 4 Unlimited v Jolan Limited considered whether the landlord had made representations to the tenant that would subsequently prevent it from enforcing the break provision contained in the lease.

This case concerned a lease for a term of 15 years from November 2007 and had the benefit of security of tenure under Part II of the Landlord and Tenant Act 1954 ("the Act"). The lease contained a landlord's break provision which could be exercised on 3 months' notice, but because it was within the Act, the landlord was required to terminate the lease in accordance with the Act, which involved satisfying one of the statutory grounds for opposing a new lease in order to validly exercise the break. 

The parties to the lease were family members and the business arrangements between the parties were complex.

The ground floor of the premises were used as an amusement arcade but the upper floors were vacant.

The landlord opposed the grant of a new lease on the most commonly relied upon statutory ground (s30(1)(f)) on the basis that it intended to redevelop the premises by demolition or reconstruction.

The landlord had obtained planning permission for its proposed development and had committed itself to various pre-lettings of the completed scheme. 

The tenant argued that, as a result of various discussions between the landlord and tenant in relation to the de-merger of the company/business arrangements, the landlord was prevented from operating the break. The tenant put its case in several alternative ways, but its main argument was that the Landlord was estopped from operating the break clause. 

What did the Court decide?

Promissory Estoppel involves a situation where one party's promise or assurance is relied upon by another party to such an extent and to their detriment that it would make it inequitable for the first party to depart from it. Estoppel by convention can arise where both parties to a transaction acted on an assumed state of facts or law, the assumption being shared by both or made by one and acquiesced in by the other.

In relation to the tenant's estoppel argument, the alleged representation was that the tenant would be able to continue the business being carried out on the ground floor of the premises for at least the remainder of the term of the lease and without the break clause being operated. The tenant argued that this representation was relied upon when calculating the value of the assets to be apportioned between the parties as part of the wider de-merger of the company/business arrangements. This was on the basis that a value had been attributed to the trading side in relation to the arcade business being run from the ground floor without taking into account that its rights of occupation were potentially uncertain.

The Court held that the landlord had not made any express representation to this effect and that no such representation could be implied. Whilst those representing the tenant in the de-merger negotiations believed that they had a lease without a break clause,  that was not as a result of anything said or done by those representing the landlord, who believed that those negotiating the deal must were aware of the existing of the break.

Practical point

One of the arguments raised by the tenant was that the original transfer of the building to the landlord should be rectified on the basis that this transfer should have included a covenant by the Landlord that the lease would be construed as if the break could only be operated in relation to the upper floors of the building, and not the arcade premises below.

This argument was rejected by the Court. Because the lease was protected by Part II of the Act, the landlord would only be entitled to serve a section 25 notice to terminate in respect of the whole of the premises; it is not possible to serve a section 25 notice in respect of part only of the demised premises. That being the case, if the transfer had been rectified to include a covenant that the break could only be operated in relation to the upper floors, this would in actual fact have prevented the landlord from obtaining possession of the upper floors as it would not have been in a position to serve a valid section 25 notice.

Naomi Cunningham is a solicitor in the Michelmores Property Litigation Team. For further information on the issues raised in this article, please contact Naomi at naomi.cunningham@michelmores.com.