Breaking Up is Hard to Do

17 April 2014

Author: Dawson McConkey
Practice Area: Real Estate

Dmcconkey

It is not as if the exercise of break clauses in leases was an issue that was in need of more recent case law, but another recent decision will help landlords to sleep better in their beds at night than tenants.

In Friends Life Ltd –v- Siemens Hearing Instruments Ltd [2014], the English Court of Appeal overturned an earlier decision of the High Court to hold that a notice to exercise a right to break was ineffective as it did not comply with all the requirements stated in the Lease.  In this instance, the break clause in a lease of January 1999 stated that the notice “must be expressed” as being given under Section 24(2) of the Landlord and Tenant Act 1954.  When the solicitors acting for the tenant served the break notice in September 2012, they referred to the relevant clause of the lease, but did not state that the notice was given under this section.  When the validity of the notice was queried by the landlord, the High Court held in the first instance that it was still valid as its intention was clear, notwithstanding the fact that it failed to comply with a specific requirement of the break clause.

On appeal by the landlord, the Court of Appeal highlighted that the break clause gave the tenant the option to break the lease and it was therefore a unilateral (as opposed to bilateral) contract.  It is an often stated point of law that unilateral contracts are only valid if their exact terms are followed.  The most famous statement on this point was Lord Hoffman in Mannai Investment Co Ltd –v- Eagle Star Life Assurance [1997], when he said:

“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.”

In light of this, the Court of Appeal said that the inclusion of the word “must” in the break clause was emphatic and imperative.  The use of that word made it impossible to interpret the clause as if it read “the notice must be served in a certain way, but it does not matter if it is not.”  The Court of Appeal accordingly allowed the appeal and held that the right to break had been incorrectly exercised.

The lessons from this case are twofold.  Firstly, if a tenant purportedly exercises a right to break its lease, then its landlord should carefully consider whether its tenant has fulfilled all the requirements on which the validity of the break notice depends, as it is likely that the break will not be saved by the Mannai principle if the requirements have not been followed to the letter.  Secondly, the lesson for tenants was put succinctly by Lord Justice Lewison in his summary judgement, when he said:

“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.”

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