WELCOME TO CHARLES RUSSELL SPEECHLYS.
We would like to place strictly necessary cookies and performance cookies on your computer to improve our website service.
Otherwise, we'll assume you are OK to continue. Please close this message
This case concerned the construction of a break notice. The decision demonstrates that parties should always consider the contents of a break clause with the utmost care before serving a notice.
Siemens occupied premises in Crawley, West Sussex pursuant to a lease which included a tenant-only break option at clause 19. The break date was specified to be 23 August 2013 and the material part of clause 19 was clause 19.2, which stated as follows:
“Subject to the pre-conditions in clause 19.3 being satisfied on the Termination Date, and subject to clause 19.4 the Tenant may determine the Term on the Termination Date [ie 23 August 2013] by giving the Landlord not more than 12 month’s [sic] and not less than six month’s [sic] written notice, which notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954. The term will then determine on the Termination Date, but without prejudice to any rights of either party against the other for any antecedent breach of its obligations under this Lease”.
On or around 28 September 2012 (ie within the notice period provided for by clause 19), Siemens’ solicitors served a break notice which purported to terminate the lease on 23 August 2013 in accordance with clause 19 of the Lease.
The landlord challenged the validity of the break notice on the basis that, contrary to the express wording of clause 19.2, the break notice failed to state that it was given under section 24(2) of the Landlord and Tenant Act 1954.
The point here was that there is no such thing as a notice under section 24(2) of the 1954 Act; this section merely confirms that a tenancy protected by the Act can still be determined by surrender or forfeiture – or by notice to quit from the tenant in accordance with the terms of the tenancy.
Decision at first instance
At first instance, the judge found that the notice’s failure to comply with the requirements of the break clause was not necessarily fatal to its validity. In his view, where a statute or professionally-drafted contract does not provide that a non-compliant notice is invalid or ineffective, it can be concluded that a non-compliant notice might survive.
This led to the conclusion that the nature of a break notice requirement should be considered in each case in order to assess the effect of failing to comply with it. Referring to the Court of Appeal decision in Newbold & Ors v Coal Authority  EWCA Civ 584, the judge noted that there might be three possible effects from such a failure:
In order to decide upon the appropriate outcome, the judge agreed with the Court of Appeal’s view in Newbold that an objective assessment had to be made of:
“...the words of that statute or contract, in light of its subject matter, the background, the purpose of the requirement, if that is known or determined, and the actual or possible effect of non-compliance on the parties".
The judge noted that the break clause here did not specify that any failure to refer to section 24(2) would be fatal to a break notice (unlike other elements of the clause) and it considered it unlikely that the parties had intended to make the exercise of such an important right dependent upon the inclusion of meaningless words.
Moreover, the omission of the reference to section 24(2) made no difference to the landlord – it would not have given the landlord any important or relevant information.
Accordingly, the judge held that the notice in this case was effective to trigger the break clause in the lease, even though it failed to include the wording specified in the break clause referring to section 24(2) of the 1954 Act.
Decision on appeal
The landlord’s appeal was successful and the break notice was found to be invalid.
Lewison LJ delivered the leading judgment, who was formerly a leading QC in this field of law.
He explained that the reference in the break clause to section 24(2) of the 1954 Act stemmed from the uncertainty at the time of the lease (not finally determined until some time later) as to whether a tenant could exercise a break option by serving notice under section 26 of the 1954 Act to request a new tenancy.
This would have allowed a tenant to engineer a downwards rent review in a falling market.
Lewison J therefore concluded that draftsman here had sought to avoid this risk by requiring the tenant to confirm that any break notice was being given under section 24(2) – rather than section 26 – of the 1954 Act.
Lewison J examined the case law on option notices and commented on the importance of consistency of approach when considering the interpretation of break clauses in commercial leases.
He noted that there is a well-established principle for unilateral contracts such as options that the terms of exercise must be fully complied with and he referred to the famous quote from the Mannai decision on the validity of notices:
“If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.”
Noting that the express wording of clause 19.2 stated that the notice “must be expressed to be given under section 24(2)…”, Lewison J stated that “must” is an “emphatic and imperative word” and held that it did not justify any interpretation so as to allow the requirements of the clause to be ignored.
This is another case which demonstrates the difficulties which can arise in preparing notices. It would certainly have been far easier for the notice to have included the relevant wording required by the break clause with an explanation that the tenant did not consider it to have any relevance.
Each case will always turn on its own facts – in particular the wording of the lease – but Lewison J had a clear message for those with the benefit of a break option:
“The clear moral is: if you want to avoid expensive litigation, and the possible loss of a valuable right to break, you must pay close attention to all the requirements of the clause, including the formal requirements, and follow them precisely.”
This case is an illustration of the approach that should be taken by tenants when complying with break conditions and shows the Court’s reluctance to imply terms into contracts.
M&S was the tenant of four floors of an office building in Paddington, London, known as “The Point”. M&S’ occupation was regulated by four leases, with each lease having been granted on identical terms (at least as regards the issues in dispute).
The Court (and therefore this summary) focussed only on the lease in respect of the 3rd floor premises.
The lease was granted from 25 January 2006 to 2 February 2018. M&S had the benefit of an option to determine the lease on 24 January 2012 (and again on 24 January 2016) in the following principal terms:
“8 OPTION TO DETERMINE
8.1 For so long as the Tenant is Marks and Spencer plc. or a Group Company thereof the Tenant may determine this Lease on the First Break Date [i.e. 24 January 2012] by serving on the Landlord written
notice on or prior to the First Break Notice Date.
8.2 This lease shall only determine as a result of notice served by the Tenant under [Clause 8.1] if on the break date there are no arrears of Basic Rent or VAT on Basic Rent; and
8.3 This Lease shall only determine as a result of notice served by the Tenant under Clause 8.1 if on or prior to the First Break Date the tenant pays to the landlord the sum of £919,800 plus VAT.
8.4 On determination the Tenant shall deliver to the Landlord the original of this Lease and all other tenancy documents in its possession relating to the Premises.
8.5 The Landlord may in its absolute discretion waive compliance with all or any of the conditions or obligations set out in Clause 8.3.
8.6 If the provisions of this clause are complied with then on the Break Date this Lease shall determine but without prejudice to the rights of either party in respect of any previous breach by the other”.
On 7 July 2011 (ie before the First Break Date), M&S served notice on the landlord to terminate the lease on 24 January 2012.
In accordance with the above, the lease would then determine provided that there were no arrears of Basic Rent or VAT on the Basic Rent as at 24 January 2012 and if M&S, on or prior to 24 January 2012, had paid the sum of £919,800 plus VAT to the landlord.
On 8 December 2011, the landlord invoiced M&S in relation to the “Basic Rent” (plus other sums due under the lease) for the period 25 December 2011 to 24 January 2012. Instead of paying this apportioned amount, M&S paid the sums that, but for the break, it would otherwise have had to pay in respect of the whole quarter.
M&S later paid the premium of £919,800 plus VAT. M&S also paid in full a number of other items including a car park licence fee, insurance premiums and service charge.
The result of M&S’ actions was that it had complied with the conditions in the break clause (this was not disputed by the landlord).
M&S then sought to recover all of the sums it had paid in respect of the period after the termination of the lease on 24 January 2012, which the landlord refused to refund.
The Court at first instance considered two key issues:
Decision at first instance: compliance with the break conditions
The lease provided that the rent would be paid ‘yearly and proportionately for any part of a year by equal quarterly instalments in advance on the Quarter days’. Because of the wording ‘proportionately for any part of a year’, Morgan J found that only an apportioned amount of rent would have needed to be paid on the last quarter date (ignoring the existence of the break clause).
(In any event, the same outcome would have been reached if the lease had not included this wording following the judgment of York v Casey  2 EGLR 25.)
Morgan J noted that the break clause was conditional and the conditions were not satisfied by 25 December 2011.
Accordingly, despite the wording in the reservation of rent and the service of the break notice, he held that M&S was required to pay the full quarter’s rent on 25 December 2011 (rather than an apportioned amount) because it was not certain at that time that the lease would end on 24 January 2012 (this approach was confirmed by the Court of Appeal).
He also confirmed that, had it been certain as at 25 December 2011 that the lease would end on 24 January 2012 (eg if there were no conditions attached to the break right), then only an apportionment of the rent would have been due.
M&S was therefore found to have been correct to pay the full quarter’s rent for the period 25 December 2011 to 24 March 2012. This decision was not challenged on appeal.
Decision at first instance & on appeal: recovery of the overpaid sums
On this second issue, Morgan J decided that - whilst the lease did not contain an express provision allowing M&S to recover the overpaid sums from the landlord - there was an implied term to this effect (at least in respect of the rent, insurance premiums and car park licence fee).
He felt that the implied term was necessary to give business efficacy to the lease and that the suggested term was obviously what the parties had intended.
Morgan J placed significant reliance on the fact that the break clause provided for a premium of £919,800 plus VAT to be paid. In his view, this indicated that the parties had clearly applied their minds prior to the grant of the lease to the compensation which the landlord would receive if M&S were to exercise the break on 24 January 2012.
He considered it unlikely that the parties would have intended the landlord also to retain the full quarter’s rent. Further, he noted that the suggested term could be clearly and easily expressed and did not contradict any express term of the lease.
Morgan J therefore ordered the landlord to repay to M&S the overpaid rent and other sums.
On appeal by the landlord, the Court of Appeal agreed with Morgan J that the correct test to determine whether or not a term should be implied into a contract was that set out by Lord Hoffman in the Privy Council case of A.G. of Belize v Belize Telecom Ltd  1 WLR 1988.
However, they differed from him in the application of that test and concluded that there should be no implied term for repayment of sums covering the period after the break date.
In reaching this conclusion, the Court made the following points:
Whilst much still depends on the exact wording of a lease, the decision in this case shows the Court’s unwillingness (at least at Court of Appeal level) to imply terms into contracts.
The case is also a good illustration of the behaviour of a prudent and well-advised tenant, who is now likely to arrange to pay sums due under a lease in full whenever a break date falls during a quarter period and there is a conditional break option.
PCE Investors Ltd v Cancer Research UK (2012)
Another case on the payment of rent where the break date falls during a quarter period and the rent is due in advance. The break option in this case was conditional upon the tenant paying its rent up to the “Termination Date” and the landlord did not respond to the tenant’s attempts to establish the relevant sum.
The result was that the tenant failed to exercise its break option because of the failure to pay the full quarter’s rent. The tenant argued that the landlord was estopped from pursuing such an argument (this decision was due to be appealed but the parties settled before the appeal could be heard).
Avocet Industrial Estate LLP v Merol (2011)
This case illustrates the importance of strictly complying with break conditions if a tenant wants to break its lease successfully. The tenant was unsuccessful in attempting to operate the break clause contained in the lease because of default interest due on late payments of rent by the tenant – even though no such interest had been demanded by the landlord.
This article was written by Emma Humphreys.
For more information please contact Emma on +44 (0)20 7203 5326 or email@example.com