Break clauses and sub-leases: PW & Co v Milton Gate Investments Limited

In  PW & Co v Milton Gate Investments Limited ([2004] Ch. 142) Milton Gate Investments Limited (‘MG’) was the landlord and PW & Co (‘PW’) was the tenant of office premises. The lease (‘the head-lease’) was for a 25-year term.

The head-lease contained a break clause (clause 5(6) of the head-lease) entitling PW to terminate the head-lease by giving not less than 12 months’ notice to expire on 24 June 2002. The head-lease provided that if PW exercised this right, it would pay MG a sum equivalent to 9 months’ rent (‘the penalty’).

The penalty was not payable if, as at 24 June 2002, not less than 75% of the area contained in the head-lease was sub-let through leases approved by MG with an unexpired term of at least five years. PW granted seven approved sub-leases.

PW exercised its rights under the break clause. It argued that it was not obliged to pay the penalty because of the approved sub-leases.

This argument failed. It was established in Pennell v Payne that the effect of determining a head-lease through the exercise of a break right is that any sub-leases are also determined. Thus, the condition for escaping the penalty was not satisfied.

Clause 5(6) was an attempt to contract out of Pennell v Payne in that it envisaged that the approved sub-leases would survive PW’s exercise of its break right. It is not possible to contract out of Pennell v Payne:

‘When a tenant grants a subtenancy, he is granting a subsidiary estate out of the estate vested in him by the head tenancy. As a matter of principle, it would seem to follow ineluctably that, if and when the head tenancy determines, and the estate thereby created ceases to exist, any subsidiary estate carved out of it, including any subtenancy, must also determine. It is, I suppose, an example of the maxim nemo dat quod non habet. Ultimately, that is the simple proposition upon which decisions such as Pennell v Payne [1995] QB 192 and Barrett v Morgan [2000] 2 AC 264 rest. If that is the right analysis, it is difficult to see how a subtenancy can survive a destruction of the head tenancy simply because the landlord and head tenant agree that it should.’ (Neuberger J. at 164).

Michael Lower

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