Out-Law News | 08 Feb 2018 | 4:15 pm | 3 min. read
The case is "a reminder that the courts will be slow to save defective notices", according to property disputes expert Ian Morgan of Pinsent Masons, the law firm behind Out-Law.com.
The tenant, Integro Insurance Brokers, had argued before the court that its notice was valid as the lease had been formally assigned to it by previous tenant Robertson Taylor, whose business it had recently acquired. The judge agreed that although Integro was entitled to the benefit of any covenants in the lease for the benefit of tenants, this did not apply to a break clause.
An argument that a "reasonable recipient" of the notice would have known that, legally, it should have come from Robertson Taylor as the registered tenant rather than Integro was also rejected by the judge.
"In practice, we commonly see the wrong parties cited on notices and it is a fertile source of litigation," said Morgan.
"The effect of failing to exercise a break clause, where the break date is fixed, is that the party loses the right to exercise it and they are required to remain in the property for the remainder of the term, or to reach a commercial settlement with the landlord – often involving a significant payment. Break notices in particular, from a practitioner's perspective, are one of the biggest sources of property professional negligence claims," he said.
The lease, of commercial premises in London, was granted to Robertson Taylor on 14 March 2013 for a 10-year term. A break option in the lease allowed the tenant to terminate on 14 March 2018, provided that it gave the landlord no less than nine months written notice.
Following the acquisition of the business by Integro, Robertson applied for and was granted licence to assign the lease to Integro on 23 March 2017. The licence contained a covenant requiring Integro to apply to register the assignment of the lease at the Land Registry within 10 business days. The assignment was completed on 29 March 2017, signed by the same director on behalf of each of the companies, and notice of the assignment given to the landlord on 20 April 2017.
Integro did not register the assignment with the Land Registry until shortly before 7 July 2017, when its registration as tenant was completed. It purported to exercise the break clause in the lease on 2 May 2017 by way of a letter from its then law firm, EC3 Legal, which had also acted on the assignment.
Before the court, Integro argued that under the 1995 Landlord and Tenant (Covenants) Act, it had been entitled to exercise the break option. The assignment had effectively "releas[ed] [Robertson Taylor] from the tenant covenants and transferr[ed] the benefit of the landlord covenants to [Integro] as from the assignment". The judge, however, disagreed, on the grounds that a break option "confers a unilateral right on the grantee and only a contingent obligation on the grantor".
"The obligation of the landlord, which is a 'landlord covenant' for the purposes of the Act, is the obligation to treat the lease as terminated with effect from the specified date if a valid break notice is served," he said. "But the obligation is only triggered if the condition is satisfied."
"In my judgment, Integro obtained the benefit of the landlord's obligation … on the date of the assignment and Robertson was released from the tenant covenants with effect from the same date, but the landlord's obligation to treat the lease as ending on 14 March 2018 depends on 'the tenant' giving appropriate notice ... [T]he Act does not vary the meaning of the condition in the break option ... Title to the legal term of years remained with Robertson," he said.
The decision in this case was relatively clear-cut, as Integro did not apply to register with the Land Registry until two months after it had attempted to exercise the break clause, according to property disputes expert Ian Morgan.
"The court did not have to deal with the issue of what would have happened had the tenant applied to be registered at the time it served the break notice," he said. "However, absent categorical guidance on this point, the safest course is to wait until registration has been completed or to deal with the matter contractually - for instance, to require the assistance of the assignor."