Lease Break Opportunities/Traps


2014 has seen another reminder to all tenants who think a break right in a lease they have is a clear right/opportunity, that they risk finding the “small print” trips them up; as a result, many tenants are trapped to pay and perform lease obligations for years after they tried to break the lease in question.

Friends Life Ltd v Siemens Hearing Instruments Ltd [2014] EWCA Civ 382 involved the Court of Appeal reversing a decision of the High Court and ruling that a lease continued, despite the tenant having served a break notice before the critical correct time.  This case is tolerably amusing if you read it as if it were fiction but for the tenant locked in by legal technicalities and missing out on shedding property liabilities, when it expected to be able to drop those obligations, it is no doubt a disaster.

A 25 year lease for a term commencing in 1998 included this clause:

“19.1 In this clause the Termination Date means 23 August 2013.

19.2 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 by giving the Landlord not more than 12 month’s and not less than six month’s 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.

19.3 The pre-conditions are that:

19.3.1 vacant possession of the whole of the Premises is given to the Landlord; and

19.3.2 all Rent and other sums due under this Lease up to the Termination Date have been paid in full; and

19.3.3 the Tenant has paid to the Landlord on or prior to the Termination Date (in addition to the Rent and other sums due under this Lease) a sum equal to one-half of the annual Rent payable by the Tenant under this Lease as at the date of service of the Tenant’s notice pursuant to clause 19.2”

This bit “which notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954” got overlooked – or perhaps the lawyers serving the notice knew it to be out of date/misconceived.  The decision in Garston v Scottish Widows of 1996 (which decision prevents tenants from using break clauses as an opportunity to call for a new lease) was, when the lease in question was being finalised, potentially to be taken successfully on appeal; by the time the break notice was due to be served, that case was generally accepted and it is most unlikely to be reversed.

However irrelevant it may be that the critical notice was due to say that it was given under s24(2) of the 1954 Act, one of the greatest Property Lawyer minds in the Court of Appeal has said the fault in the notice is fatal and he ends a 10 to 15 page decision (depending on font size and margins!) in this way:

“65. I do not accept that in the field of unilateral (or “if” contracts) there is any room for the notion of substantial compliance. As Diplock LJ said in United Dominions Trust the question is whether the relevant event has occurred. That question is to be answered “Yes” or “No”. It cannot be answered “Almost”. Either a purported exercise of an option satisfies both the formal and substantive provisions of the clause, or it does not. If it does not, then it is ineffective. In my judgment ours is such a case. I appreciate that that is a harsh result, but hard cases make bad law.

Result

66. For these reasons I would allow the appeal. 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.”

It is tempting to end with words such as tenants beware but, of course, many break clauses are exercised by landlords and many other notices under property transactions, which buyers/sellers/lenders/borrowers/landlords/tenants/covenantors or covenantees need to do properly, will also have requirements set out in them.  Ignoring those requirements or getting them wrong can be very costly indeed, as the Court of Appeal has chosen to remind us all.

Rufus Ballaster
Real Estate team

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