In these uncertain economic times, tenant’s break clauses in leases continue to attract attention. This article offers some helpful tips for tenants on how to avoid problems and pitfalls.
Action Point:
Make sure that the Break Notice refers to all current tenants.
Although this requirement might sound rather obvious, the recent case of Prudential Assurance Co. Limited -v- Excel UK Ltd [2009] highlights the important of getting the details on the notice correct.
A property was leased to two joint tenants (both being members of a group company) and the lease contained a tenant break option to terminate the lease on a specified date, on nine months’ notice. A notice exercising the break option contained in the lease was issued by solicitors expressed to be given on behalf of only one of the two joint tenants, as one of the tenants was still trading but the other was dormant. The landlord claimed that the notice was invalid.
The tenants argued that the notice was clear and unambiguous, that it must be understood to have been given on behalf of both joint tenants and that it was, therefore, clearly intended to be effective. Unfortunately for the tenants, the judge disagreed.
Whilst the Court was satisfied that the solicitors involved were indeed authorised by the group of companies in question, they had failed to serve the notice on behalf of both joint tenants, and therefore it could not be relied upon sufficiently to enable the recipient to effectively bring the lease to an end.
The test to be applied was, therefore, whether the notice would have clearly and unambiguously be understood by a reasonable recipient to be an effective notice given on behalf of both joint tenants.Action Point:
Make sure that the Break Notice includes the correct names
The devil is most certainly in the detail. In Baker Tilly Management Limited -v- Computer Associates UK Limited [2009] the importance of getting the simple things right is clear.
The tenant was named in a lease containing a break clause as ‘Baker Tilly Services Limited’. Following the grant of the lease the tenant had subsequently changed its name to ‘Baker Tilly Management Limited’. The tenant then served notice on the landlord exercising the break in the name of ‘Baker Tilly Services Limited’. Although the specific requirements of the break clause had been satisfied, the notice had been served in the tenant’s old name and the landlord, therefore, claimed that the break notice was ineffective.
The Court suggested that the crucial issue was what the words used would mean to the recipient of the notice in the context of the transaction. Would a ‘reasonable landlord’ understand what was intended by the notice?
The tenant had not changed, only the name of the tenant company and it was, therefore, the same legal entity that it had always been. The Court therefore held that the notice was valid.Action Point:Has the Break Notice been served in time?
The recent case of Orchard (Developments) Holdings plc -v- Reuters Ltd [2009] highlights the importance of tenants not leaving service of the break notice until the last minute.
The tenant had been granted a fifteen year lease of the property which contained a tenant’s break clause after the fifth and tenth years of the term, by giving to the landlord six months’ notice. The lease also provided that, unless the receiving party or its authorised agent acknowledged receipt, a break notice would only be valid if it was sent by registered post or by recorded delivery. The last date for service of a break notice under the terms of the break clause contained in the lease was 30 July 2005 and on Friday 29 July 2005 the tenant issued a break notice and served this by hand to the landlords address. Unfortunately it was delivered to the wrong address. Further copies of the break notice were subsequently sent by fax on both 29 and 30 July 2005, which, under the terms of the break clause contained in the lease, had to be acknowledged by the landlord or its agent to be effective. Both faxes arrived at the landlord’s offices but, unfortunately, they arrived after the landlord’s offices had closed for the weekend.
The Landlord subsequently refused to acknowledge receipt of the faxes until after the break date had passed and the tenant vacated the property, in accordance with its break notice, and ceased to pay rent to the landlord. The landlord disputed the validity of the tenant’s break notice, but did admit later that the faxes had in fact been received. The tenant claimed that the landlord had retrospectively acknowledged receipt of the faxed notices and was not entitled to frustrate the break notice provisions simply by refusing to acknowledge receipt of the notice.
At first instance the Court agreed with the tenant but the landlord subsequently appealed to the Court of Appeal, which found in favour of the landlord, concluding that the notice was ineffective, for the following reasons:
• There was no obligation on the landlord in the lease to acknowledge receipt of a notice (given the formal methods of service specified in the lease) and the landlord’s argument that in order for an acknowledgement of notice to be relied upon it had to be given within a reasonable time was incorrect.
• Under the terms of the lease, acknowledgement was mandatory and was essential to the validity of the notice.• There could be no retrospective acknowledgement of the break notices and no valid acknowledgement of receipt of the break notices could be given after the deadline for serving the break notice had passed. A notice requiring acknowledgement would, therefore, be valid and take effect only from the date of any acknowledgement, which had to occur before the break date specified in the lease.
• There had in this case been no acknowledgement of the notice before the break date specified in the lease and, therefore, the break notice was invalid.
Conclusion
The above three cases provide a useful reminder of some of the main problems and pitfalls regarding the operation of break clauses and the service of break notices under their terms. We would suggest that tenants should always instruct a solicitor to prepare and serve the break notice on their behalf, giving themselves and the solicitor plenty of time to do so, in accordance with the timeframes specified in the lease.
Tenants should always consider when they decide to issue a break notice whether there are any specific conditions contained or referred to in the break clause which must be complied with for the break to be effective, such as the payment of rents or the requirement to hand the property back to the landlord in particular state of repair or condition. If required by the break clause, satisfaction of such conditions will be essential for the break to be effective and will prevent the landlord from successfully defeating the break which, in an uncertain market, landlords may attempt to do.
Conversely, landlords in receipt of break notices should strongly consider taking legal advice as soon as possible following receipt of a break notice, as the notice might well be defective or have been served incorrectly. Landlords should also strongly consider seeking further professional advice (in particular, from a qualified surveyor) as to whether any conditions in respect of the valid exercise of a break option by a tenant have been complied with. Such professional advice could result in landlords saving significant amounts of time and money involved in locating and securing a new tenant for the property in what continues to be a deflated and uncertain market.
This articles offer general guidance and reflects the law as at March 2010. The circumstances of each case vary and this article should not be relied upon in place of specific legal advice.
