Be Careful About Giving A Landlord A Right To ‘Break’ A Lease – He Might Do So!

The recent case Wigan BC v Scullindale Global Ltd [2021] EWHC 779 (Ch) illustrates the importance of taking care when giving a landlord a right to ‘break’ a lease and taking even more care to avoid giving a landlord the grounds for exercising the ‘break’ and ending the lease.

Wigan BC v Scullindale Global Ltd

Case summary

Scullindale Global Ltd had paid £400,000 for a 199-year lease of a stately home site and had given Wigan Borough Council the right to ‘break’ the lease (i.e. end it) if Scullindale did not, in accordance with the Planning Permission, complete conversion of it into a four-star boutique hotel by 23rd May 2018. 16 months after 23rd May 2018, Wigan BC served notice exercising the ‘break’.

Scullindale argued it had refurbished the property to a four-star standard hotel. But it had not done so “in accordance with the Planning Permission”. The approved floor plans in the Planning Permission showed a 30-bedroom hotel, and the permissions included a rooftop ceremony room. The Court said completion had not occurred.

Scullindale argued that completion had been delayed by Wigan BC. The Court said:

1. Any delays of Wigan BC, as the Local Planning Authority would not have a bearing on the lease between Wigan BC, as the Landlord, and Scullindale, as the Tenant. Nothing in the Lease would prejudice or abridge any rights or powers of the Landlord as the Local Planning Authority for the area;
2. Otherwise, no delays by Wigan BC, as the Landlord, had caused the failure to complete the refurbishment on time.

Scullindale argued that a term should be implied into the break clause that any notice to terminate was to be served by the Landlord within a reasonable time of default, rather than “at any time”. This was rejected by the court.

To imply into a right to terminate, expressed as one to terminate “at any time”, a requirement to terminate “at any reasonable time” after the ‘Event of Default’ would contradict the express words the parties had chosen to use.

The best that the Judge was prepared to do was to imply that the Landlord could terminate “at any time” after an Event of Default “whilst an Event of Default persists”. But the default was still subsisting at the time the Landlord had terminated.

Two pieces of consolation for Scullindale:

1. Under the terms of the Lease, it was entitled to something back – the lesser of:
   1. the open market value of the premises, or
   2. the premium paid by the tenant plus the value of any improvements carried out prior to the termination.
2. Wigan BC failed in its claim for ‘mesne profits’ (i.e. the equivalent of rent) for the Property after the date of the ‘break’ since the Court thought re-letting prior to the end of the Covid-19 lockdown was unlikely and there was no benefit to the Tenant in retaining possession of the Property during this time.

Can a landlord or tenant exercise a ‘right to break’ while itself in breach of the lease?

Yes. There is no general rule that a party in breach of contract cannot take advantage of a right to terminate on the occasion of the other party’s breach of contract.

However, subject to any express term of the contract to the contrary, the Court will imply a term that a party to a contract cannot rely upon their own breach of a contractual duty under the contract to bring about a termination of it.

After Scullindale had missed the 23rd May 2018 date, could Scullindale have made Wigan BC elect to either ‘exercise its break’ or lose it?

Yes. The Judge said that he would have been happy to imply a term into the break right that enabled the Tenant to give notice to the Landlord to make “time of the essence” of the exercise of its right (a form of “use it or lose it” notice).

Even though Wigan BC had validly terminated the Lease, could Scullindale have claimed a renewal under the ‘business tenancy security of tenure’ provisions of the Landlord & Tenant Act 1954?

The Lease was not ‘contracted out’, so the 1954 Act applied.

So the exercise of the ‘break’ ended the ‘contractual tenancy’ and in order to regain possession, Wigan BC would have to serve upon the tenant a section 25 notice under the 1954 Act. But the statutory right limits the maximum new lease that can be awarded under the 1954v Act to 15 years.

Scullindale would, no doubt, prefer to choose its contractual right to receive a capital payment as above.

Whilst break provisions are beneficial for both parties to have (the benefit to the tenant being the security of a long term lease with the flexibility to deal with an uncertain future and therefore limit its liability, and the benefit to the landlord being a modicum of control and pre-conditions to remove a tenant for non-compliance), tenants should be careful with the wording used and the level of control being provided to the landlord.