Court of Appeal Warning to Tenants Exercising Break Clauses in Commercial Leases

The judgment of the Court of Appeal in Friends Life Ltd v Siemens Hearing Instruments Ltd [2014] EWCA Civ 382 (3 April 2014), likely to be persuasive in the eyes of the Jersey Royal Court, emphasizes the need to pay close attention to all the requirements of a break clause, including the formal requirements, and to follow them precisely.

Overturning an earlier High Court decision, the Court of Appeal held that a notice purporting to exercise a break clause in a lease was ineffective because it failed to include wording specified by the lease. The lease had stated that "…the Tenant may determine the Term on the Termination Date 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 words shown in emphasis were apparently included in an attempt to ensure that the tenant could not exercise the break and then request a new tenancy under section 26 of the LTA 1954.

In September 2012, solicitors acting for Siemens served a break notice on Friends, indicating an intention to terminate the lease on 23 August 2013. The notice referred to clause 19 of the lease, but did not state that notice was given under section 24(2) of the LTA 1954, as required by clause 19.2. At first instance the High Court held that, although the notice failed to comply with the requirement to refer to section 24(2) of the LTA 1954 as set out in the lease, the notice was still valid. However the Court of Appeal dismissed the argument that the notice was compliant because, in its effect, it complied with section 24(2) even though it had not specifically referred to it. Compliance with the substantive provisions of section 24(2) was not the same as complying with the formal requirements of clause 19.2. Furthermore, because clause 19.2 required that the notice be "expressed" to be given under section 24(2), it was not sufficient that it conveyed that message implicitly. The Court of Appeal cited Lord Hoffman in Mannai Investment Co Ltd v Eagle Star Life Assurance [1997] AC 749 who 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."
The Court's conclusion was plain - because the notice did not comply with the precise requirements of clause 19.2, it had not been successfully exercised.
Attempts by tenants to break their leases are often resisted by landlords particularly when the economic climate means potentially cheaper, better properties are readily available and new tenants are in short supply at the right price. It is, therefore, in a landlord's best interests to carefully consider whether the tenant has fulfilled all the requirements on which the validity of the break notice depends and to challenge the break notice if it is less than perfect and would not be saved by the Mannai principles. 

The position was put succinctly by Lord Justice Lewison:

"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."

Tenants should be aware that break clauses represent a potential trap as far as their lease is concerned, and should always take early legal advice if considering exercising a break option. 

Please do not hesitate to contact us if you wish to discuss this decision or its implications.