Introduction
1. In a difficult market there will often be nothing so valuable to a commercial tenant as the ability to extract itself from an onerous lease by exercising a right to break. For a landlord short of suitable (solvent) tenants the loss of a tenant can be particularly damaging and it will do all that it can to block the tenant’s escape route.
2. The purpose of this seminar is to take a look at the problems that confront tenants trying to break their leases early and to examine the arguments that a landlord can deploy to hold the tenant to its covenants.
3. The exercise of a break clause in any lease involves bringing the lease to a premature end. English law has always taken a very strict approach the construction of such clauses and to compliance with them: see Friar v Grey (1850) 5 Ex 584. Fairness in commercial dealings is achieved through certainty.
4. In Proctor & Gamble Technical Centres Ltd v Brixton Plc [2003] 2 EGLR 24 Neuberger J said this:
The formal requirements are normally laid down by the clause which confers the right to break, and they are to be strictly complied with. The most familiar formal requirements are time limits, in this case, the requirement that the notice is served not less than six months before the break date, and the requirement of compliance with covenants, in this case, the payment of rent and performance of other covenants in the lease. Such requirements have to be strictly complied with...
5. This was brought into sharp focus in the decision of the High Court in Avocet Industrial Estate LLP v Merol Ltd [2011] EWHC 3422 (Ch), where it was held that a failure by the tenant (Merol) to have paid £130 in default interest due on historic arrears of rent (which were up to date by the break date) was sufficient to render the exercise of a break clause invalid. The consequences of failure can be extreme!
The right to break
6. The first question to ask is “does the lease allow for early termination?” It may seem obvious, but not every lease contains a right for one or other party to bring it to an early end. If the lease does contain a break clause, who has the benefit of it? The relevant clause may grant the right to break to the landlord, the tenant or both? We are concerned with the right of a tenant to terminate early.
Who may exercise the right?
7. As has been said, the courts take a strict approach taken to the construction of break clauses. This means that it is vital to identify who it is that is entitled to give notice and to identify them correctly. It is usually only the current tenant that is entitled to exercise the break option. In Proctor & Gamble Technical Centres Ltd v Brixton Plc (above) the landlord granted to Proctor and Gamble Health & Beauty Care Limited (“H&B”) a lease of commercial premises for a term of 20 years subject to the right to break the lease at the 5 and 8 year points. Shortly before the 5th anniversary of the term H&B sought, and were granted, consent to assign the lease to a group company and from that company to Proctor & Gamble Technical Centres Ltd (“TC”), which was also within the same group.
8. Some 3 years later the group decided to get rid of the lease and instructions were given to solicitors to exercise the break clause. However, the effect of the earlier assignment was not recognised. As a result solicitors acting on behalf of the Proctor and Gamble group gave notice to terminate the lease on behalf of H&B and not TC. The landlord claimed that the notice was invalid.
9. The court agreed. The notice named the original tenant and not the current tenant and so was not be understood by the landlord as being a notice given by the current tenant to terminate its lease.
10. That decision was followed in the recent case of Prudential Assurance Co Ltd v Exel UK Ltd [2010] 1 P&CR 7. In that case the lease (of a warehouse) had been granted to 2 tenants jointly. It was a 10 year term with a right to break just before the 5th anniversary. The 2 tenants were group companies and one was the subsidiary of the other. The subsidiary was dormant.
11. In June 2006 the solicitors acting for the companies gave notice to terminate the lease. However, although the notice referred to the fact that the lease had been granted to both companies the notice was expressed to have been given on behalf of the parent company only. It was held to be an invalid notice.
12. Finally, the same result was found in Hexstone Holdings Ltd v AHC Westlink Ltd [2010] 2 EGLR.
In 2005 AHC took a 10 year lease of a warehouse subject to a right to break in October 2009. In August 2008 AHC’s parent was acquired by the Eddie Stobart Group. An announcement to that effect was sent to the landlord stating that AHC would be changing its name to that of Eddie Stobart Ltd. The landlord then directed future rent invoices to Eddie Stobart Ltd, which duly paid them. However, the name change never happened and AHC remained AHC.
13. In April 2009 notice was given under the break clause. The notice was written on Eddie Stobart Ltd’s notepaper and expressed to be “for and on behalf of” Eddie Stobart Ltd. The landlord argued that the notice had not been given by AHC and was therefore invalid.
14. The court agreed. The notice had been given by Eddie Stobart Ltd and was not expressed to be given as agent for AHC. There was no evidence that AHC had made the decision to give the notice or authorised Eddie Stobart Ltd to act on its behalf. In the circumstances the landlord could not have acted safely in the knowledge that the notice would be binding on AHC. Accordingly, the notice was invalid and ineffective to terminate the lease.
15. In the end the question whether a break notice is to be construed as having been given by the correct party depends upon how the court considers the notice would have been understood by a reasonable recipient.
16. If the right to break the lease is personal then it will be lost if the lease is assigned: see Norwich Union Life and Pensions UK Ltd v Linpac Mouldings Ltd [2010] 1 P&CR 11. In that case the right to break an 80 year lease had been granted to Linpac personally. The lease was assigned to a group company which was then sold. When that company went into administration there was an attempt by the administrators to reassign the lease to Linpac but the landlord refused consent, fearing (correctly) that Linpac would seek to invoke its personal right to terminate. The landlord was entitled to withhold consent on that basis.
On whom should notice be served?
17. Having established who should give the notice it is equally important to work out who it should be given to.
18. A good example was Hotgroup Plc v Royal Bank of Scotland Plc [2010] 32 EG 107. The tenant, Hotgroup, had a 10 year lease of parts of an office block. It had the benefit of a break clause operable after 5 years. However, the terms of that clause required notice to be given to the landlord and to its property management company. Hotgroup managed to give notice to the landlord but failed to give notice to the property company within the time limit required by the lease. That failure was fatal. The requirements of the clause were clear and unambiguous. They had not been complied with and the lease had not been validly terminated.
How should notice be given?
19. Having worked out by whom and to whom the notice to break should be given, it is the important to be clear about how the notice is to be given. Almost invariably the requirement will be to give written notice.
20. The method of giving notice is also important. In Orchard (Developments) Holdings Ltd v Reuters Ltd [2009] 1 EGLR 13 the lease contained a break clause under which the tenant could terminate the lease at the end of the fifth or tenth year by giving 6 months’ notice. In July 2005 the tenant tried to exercise the break clause. It sent notices both by letter and by fax on July 29 and again on July 30. Notice had to be given in writing by recorded delivery or registered post. In fact the letters had been delivered by hand by a process server but had been posted in the wrong letter box and so were ineffective. The faxes were received on the landlord's fax machine (at a time when the landlord's office was closed) on the dates that they were sent. However, under the notice provisions of the lease, a notice by fax was not valid until its receipt was acknowledged by the landlord. The faxes were not acknowledged until the end of the following year, well after the expiry of the relevant anniversary. The notices given were invalid and therefore of no effect.
21. Likewise, in Siemens Hearing Instruments v Friends Life [2014] L&TR 27 a notice to break a 25 term at the end of 15th year failed where the break notice (drafted by solicitors) failed to refer to section 24 of the LTA 1954, as it was required to do. The purpose of that requirement was to avoid a new tenancy being sought under the Act by the tenant. No such tenancy was sought and the trial judge upheld the notice on the ground that it was not an indispensable condition and the parties could not have intended that so important a right might founder because of a failure to comply with a meaningless formula.
22. The Court of Appel disagreed. An option is a unilateral contract. Where it provides substantive conditions that must be fulfilled in order for it to be exercised, those conditions must be satisfied. Even a “trifling” breach will be enough to lose the benefit of the right.
23. A different approach was taken in MW Trustees Ltd v Telular Corporation [2011] 1 L&TR 19. The tenant had a 10 year lease subject to a break clause to have effect on 1st March 2011. The lease contained provisions which required that any notice to be served by any party must be given in writing and would only be valid if it were sent by special delivery post or delivered by hand. If the receiving party was a company it had to be sent to the registered office of the company. If the receiving party was not a company, it had to be sent to the address shown on the lease or such other address as that party might notify to the other parties from time to time.
24. Unaware that there had been a change in freehold owners, the break notice was sent by special delivery to the previous freeholder company. That company contacted the tenant to inform it that the freehold had been transferred. The tenant then contacted the second claimant (a beneficiary of the pension trust) by email to inform him that a break notice had been sent to the previous freeholder. The second claimant replied stating that managing agents were now in charge of the property and saying that he had forwarded the email to the managing agents, who would be in touch. A representative of the managing agent then sent an email to the tenant, stating that the attached letter was accepted and confirmed that agreement to break the lease.
25. In the end the tenant had sent notice in the right form to the wrong person and in the wrong form to the right person’s representative.
26. The court held that there was no question of the landlord having been misled as to what was intended by the service of the Notice. As a result of the email the landlord knew that the tenant sought to terminate the lease and this had been acknowledged by the managing agents, who accepted the attached letter.
27. Viewed objectively the court considered that the email showed that the landlord accepted that the documentation had the effect of terminating the lease. The landlord was therefore estopped from subsequently challenging the validity of the break notice. In the alternative, the landlord had waived the requirement for the notice to be served in the manner specified in the lease.
When may the right be exercised?
28. Having decided who is entitled to exercise a break clause, it is then necessary to establish when the right may be exercised. As discussed above, the timing of any notice is one of the essential formalities in the valid exercise of a break clause. Therefore, real care must be taken to ensure that the notice is given at the time required by the lease. This will be a matter of the proper construction of the clause but a number of points should be borne in mind.
29. Where the lease specifies the date by which notice must be given, time is of the essence. A late notice will be invalid: see Quartermaine v Selby (1889) 5 TLR 223. Where the time for service of the order is calculated by reference to the commencement of the lease (eg by reference to an anniversary) the relevant date is the start of the term not the date of execution of the lease: see Trane v Provident Mutual Life [1995] 1 EGLR 33.
30. A notice should not be sent too early. A notice served an unreasonable time before the relevant break date will be as invalid as a notice that is late: see Multon v Cordell [1986] 1 EGLR 44.
31. However, all is not lost in this regard. Provided that a notice would not have misled a reasonable recipient, misstating of a date in a notice will not invalidate it. So in Mannai Investments v Eagle Star [1997] AC 749 the relevant date of termination was 13th January but the notice stated 12th January. The notice would not have misled a reasonable recipient and was upheld.
Complying with the obligations of the lease
32. Having successfully served a notice to break the lease the tenant must ensure that the other conditions to the exercise of the break clause are satisfied. Commonly this requires the payment by the tenant of all rent and other sums due under the lease and performance of the covenants under it. It is a question of construction whether the lease requires that all payments be up to date and covenants performed at the date on which notice is given or at the date on which it has effect or both.
33. A number of recent cases have demonstrated the need for strict compliance in this area.
34. Neither common law nor the Apportionment Act 1870 gives a right to apportionment of payments due in advance under a lease. Therefore, where the lease requires payment of the rent up to date at the date of termination all of the rent due on the previous quarter day must have been paid, even if the break date falls only a short time after the relevant quarter day. The tenant in PCE Investors Ltd v Cancer Research UK [2012] EWHC 884 (Ch) fell foul of this requirement. The break date fell 2 weeks after the quarter day so the tenant paid an apportioned rent (2 weeks’ worth). It was held that this meant that the tenant had failed to comply with the obligation to have paid all rent up to date and so the exercise of the break option failed. No estoppel arose from the silence of the landlord following receipt of the apportioned rent. An appeal in that case is pending but it is difficult to see any basis for the decision to be overturned: see Canonical UK Ltd v TST Millbank LLC [2012] EWHC 3710 (Ch).
35. Another example of the problems in this area can be found in Avocet Industrial Estate LLP v Merol Ltd. In that case Merol had taken particular care to ensure that the rent had been paid in full and had tendered a cheque for 6 months’ rent shortly before the relevant break date, as it was required to do. It was argued by the landlord that the tendering of a cheque that had not cleared by the break date was invalid. That argument was rejected by the Court of Appeal which found that a course of dealing by which the tenant was allowed to pay by cheque had arisen.
36. However, Merol’s willingness to pay the rent by the due date when seeking to break the lease did not reflect its approach during the earlier part of the term. It had regularly paid its rent late, thereby becoming liable to pay interest on the unpaid rent. The landlord had never demanded that interest but it was not required to. As a result, when Merol tried to exit the lease the landlord was able to point to unpaid interest of £130, which was a sufficient breach of covenant to deny the right to break the lease.
37. However, in May 2013 Morgan J offered a glimmer of hope for tenants. In the case of Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2013] EWHC 1279 (Ch), he held that a lessee who paid a quarter’s rent in advance as one of the conditions of the exercise of a break clause was entitled to recover that portion attributable to the period post-break, where the break had been successfully exercised. Morgan J held the inclusion of a qualification in respect of the rent (that it was to be paid “proportionately for any part of a year”) gave rise to an implied term that any excess would be repaid where the break clause had been successfully exercised. In the alternative, the Court found that the over-payment was recoverable in restitution on the grounds of total failure of consideration.
38. However, in the summer of 2014 the Court of Appeal disagreed, the appeal against the decision of Morgan J was allowed and orthodoxy was restored. The Court of Appeal rejected the idea of an implied term and held that the parties would have been aware at the outset of the lease of the possibility that if the break clause was exercised, the tenant would not be able to recover rent for any period extending beyond the break date: see [2014] L&TR 26. The Supreme Court agreed and dismissed the further appeal by M&S: [2016] AC 742.
39. NYK Logistics v Ibrend Estates [2011] 36 EG 94 provides a further example of the need to ensure strict compliance with the terms of the lease in order to secure an early termination of it. In that case the issue was whether the tenant had complied with its repairing obligations and had given vacant possession at the termination date. The tenant, NYK Logistics, had purported to exercise a break clause. Following service of the notice the parties had discussions regarding the works to be completed and had reached agreement on them. However, these were only agreed at a late stage and so were not complete by the termination date. The works continued after the break date with the result that workmen were still in the building at the termination date.
40. It was held that the requirement to give vacant possession requires that the property is empty of people so that the landlord is able to assume immediate possession and control of it. In circumstances where workmen were still carrying out repairs vacant possession had not been given and so the exercise of break clause was invalid. The Court of Appeal held that there was no waiver by the landlord of the strict requirements of the lease.
Conclusion
41. The wealth of recent case law on the issue of break notices shows just how important these issues are in a difficult letting market. Very substantial amounts of money often turn on the outcome. For the tenant, escaping an uncommercial lease can result in huge financial savings. For the landlord, the loss of a good tenant may be ruinous. As a result, any break notice is likely to be scrutinised in minute detail and any mistakes challenged.
42. It is therefore important to have in mind these principles:
(a) Any break notice will be strictly construed against the party serving it;
(b) If acting for a landlord or a tenant always read the break clause carefully;
(c) It is vital to ensure that the notice complies with the clause in every respect;
(d) Identify who is entitled to exercise the break;
(e) Identify who they must notify;
(f) Be clear as to when the notice must be given and when it must expire;
(g) Make sure that the notice has been given as it should have been;
(h) Once all that is done, make sure that the requirements for its exercise (in terms of payments to be made and covenants to be complied with) have been satisfied. In particular, if acting for a tenant beware of trying to save part of a quarter’s rent at the risk of incurring years of further liability.
43. Above all never be complacent. A great deal turns on the outcome!