Failure to spot a break clause

Crossco No 4 Unlimited v Jolan ([2011] EWHC 803 (Ch)) arose out of the demerger of the property and trading divisions of a group. The group was divided into a Trading Group and a Property Group. The demerger would result in the creation of two separate groups divided along these lines and separately controlled. The freehold of a building in the centre of Manchester was transferred to a company in the Property group. A company in the Trading group had a lease of the property. This lease, however, contained a break clause that allowed the freeholder to bring the lease to an end on giving three months’ notice. The freeholders intended to redevelop the building and exercised the break right. The tenants wanted to continue to trade from the building and contested the landlord’s right to exercise the break right.

The tenants (the Trading Group) had failed to notice the existence of the break clause before the demerger. The Property Group had noticed it but assumed that the Trading Group was aware of it too. They did not know that the Trading group had missed it and they had not contributed to or encouraged the Trading group’s ignorance. The Trading Group had simply assumed that they would be able to rely on the lease to ensure their right to possession for several more years.

The Trading Group relied, inter alia, on proprietary estoppel,  estoppel by convention and the idea of a Pallant v Morgan-style constructive trust in support of their claim that the Property Group could not exercise the break right. All of these claims failed because of the absence of any assurance that the break right would not be exercised, of any awareness on the part of the Property Group of the Trading Group’s ignorance of the right or of any unconscionable behaviour. The case provides a useful overview of the law in these areas.

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