Ahead of the eagerly-awaited judgment in the M&S break notice case, the Court of Appeal has re-stated the need for strict compliance with break clause conditions

Out-Law News | 04 Apr 2014 | 5:41 pm | 3 min. read

Tenants must "pay close attention to all the requirements" of a break clause and "follow them closely" if they want to be able to exercise a right to exit a lease early, the Court of Appeal has ruled.

The court held that a tenant, Siemens Hearing Instruments, could not rely on an otherwise valid break notice because it did not include the specific wording required by a condition in the break clause.

Property litigation expert Graham Halsall of Pinsent Masons, the law firm behind Out-Law.com, said that the case was an example of a classic 'blue paper' break notice case, highlighting the need for strict compliance with all break clause conditions.

"It did not matter that the required wording of the break notice was designed to protect against a problem which has now been cured by subsequent case law" he said "Nevertheless, the Court of Appeal held that the inclusion of this wording was still a condition of the break right and, therefore, failure to include it rendered the break notice invalid."

"The case also draws attention to the eagerly-awaited decision of the Court of Appeal in the M&S case which is currently awaiting a reserved judgment. In that case, the High Court appeared to adopt a more flexible approach, holding that the tenant was able to recover rent and other charges overpaid in respect of the period after it exercised its break clause. It will be interesting to see whether the Court of Appeal continues in this trend, or whether we will see a return to the more stringent approach similar to that shown in the Siemens case," he said.

A break right in a lease allows the tenant and / or the landlord to terminate the lease before its contractual end date. Often, the lease will specify certain conditions which must be complied with for the break to take effect. The most common conditions are full payment of rent, vacant possession and, in some cases, material compliance with covenants.

Siemens entered into a lease with Friends Life for business premises in Crawley, West Sussex, for a term of 25 years from August 1998. The lease contained a break right allowing Siemens to terminate the lease in August 2013 by giving at least six months' notice. One of the conditions for exercising the break was that the notice itself "must be expressed to be given under section 24 (2) of the Landlord and Tenant Act 1954". The notice served by Siemens did not contain this wording.

The rationale for this wording stems from a previously-held belief that a tenant could, when exercising a contractual break right, serve a 'section 26 request' which would both end the current lease and trigger a right to a new tenancy. This meant that, in a downward market, the tenant could effectively instigate a downwards rent review. The way round this potential problem was to include in the break notice wording similar to that which was required in the Siemens case. The courts have since ruled that tenants are unable to serve a section 26 request in this way. 

The High Court judge considered that the failure to use the required wording made no "difference at all" and "it was not something which gave the defendant necessary or even relevant information". Accordingly, the High Court held that omitting the 'magic words' in the break notice did not invalidate it.

The Court of Appeal disagreed. In his leading judgment, Lord Justice Lewison said that a break option amounted to a "unilateral or 'if' contract", under which "the promisor agrees to do something ... if the promisee does or refrains from doing something".

"It is for these reasons that where an option prescribes substantive conditions that must be fulfilled by the promisee before the promisor's obligations are triggered, those conditions must be completely fulfilled," he said. "Substantial fulfilment is not enough."

"I do not accept that in the field of unilateral (or 'if') contracts there is any room for the notion of substantial compliance ... The question is where 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," he said.

He said that although he appreciated that the decision was "a harsh result", the "clear moral" was that if a tenant wanted to "avoid expensive litigation, and the possible loss of a valuable right to break", it must "pay close attention to all the requirements of the clause, including the formal requirements, and follow them precisely".

The Court of Appeal is due to publish its judgment on an appeal by BNP Paribas, a former landlord of Marks and Spencer, shortly, after a hearing at the end of last month. In May 2013, the High Court ruled that the retailer was entitled to reclaim approximately £1.1 million in rent and other charges paid in advance, but which covered a period after it had validly exercised a break clause. Although the leases themselves did not expressly provide for repayment, Mr Justice Morgan said that a reasonable person would infer such a term from the lease.