A lucky break?

A lucky break?

Published:

Author: Kate Barry

In Siemens Hearing Instruments Limited v Friends Life Limited, the High Court has held that a break notice which failed to comply with the express provisions of the break clause was nonetheless valid.

The key lesson for landlords is to ensure that if you intend to make non-compliance with the terms of a break clause fatal, you must say so.

For tenants, not a great deal changes in practice: follow break clauses to the letter, just in case. But, if something goes awry, the language of the clause may just be flexible enough to rescue the break.

The facts

Siemens was the tenant of premises in Crawley on a 25-year lease. The lease incorporated a break option effective on 23 August 2013 subject to giving not more than 12 and not less than six months' notice and compliance with specified pre-conditions (the usual suspects: vacant possession, an up-to-date rent account and a break premium). The dispute centered on this part of the break clause:

"[subject to compliance with the pre-conditions] ...the Tenant may determine the Term on the Termination Date by giving the Landlord not more than 12 months' and not more than six months' written notice, which notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954 [our emphasis]."

Siemens' solicitors served notice in good time and for all other purposes with valid effect, but the letter giving notice did not anywhere refer to or express that the notice was given under section 24(2) of the 1954 Act.

A detailed explanation of section 24(2) is beyond the scope of this note. However, it should be noted that section 24(2) does not provide for the service of any notices and the reference to the section was illogical.

At the time the lease was drafted, there was some uncertainty concerning the interpretation of section 24(2) and around whether a tenant could serve a break notice and serve a simultaneous Section 26 request for a new tenancy to force a renegotiation of its tenancy. It was generally understood that the intention when drafting was to ensure that the tenant's exercise of the break precluded it from serving a Section 26 Request.

The outcome

The judge held that the failure to state that the notice was given under section 24(2) meant that the notice did not comply with the break option. Notwithstanding this, the judge went on to find that the notice was effective, for the following reasons:

  • The lease was well drafted. The break clause states that the break will fail for non-compliance with specified conditions. If the failure to refer to section 24(2) was intended to be fatal, the break clause would have said so.
  • The failure to include the additional wording 'made no difference at all'. It was key that the tenant did not serve a simultaneous Section 26 Request. It did not and it was not entitled to do so. The wording would therefore not have given the landlord any necessary or relevant information.
  • It was not a sensible construction of the break clause to hold that the inclusion of the required wording was mandatory in the circumstances of the case. Quoting counsel for Siemens, 'one cannot realistically attribute to the parties an intention to make the tenant's exercise of an important right dependent on compliance with a meaningless formula'.

The judgment provides some helpful advice on deciding on the effect of a non-compliant notice, whether statutory or contractual:

  • If the provision says that a non-compliant notice will be invalid, then it will be invalid.
  • If the provision does not expressly invalidate a non-compliant notice, it is reasonable to assume that this omission is deliberate and by extension, it is natural to conclude that the flawed notice might survive in at least some cases - but not all.
  • The Court will look at substance and not form: the use of mandatory sounding wording such as 'must' or 'shall' may not be decisive.
  • What is the effect of the non-compliant notice? Is the missing information essential? Has the receiving party been prejudiced in any way by the non-compliance? Some provisions might look mandatory, but are really directive, a form of hybrid between being and not being mandatory. It depends on the nature and extent of the mistake and its effect.
  • Option provisions are normally mandatory, but the court has flexibility in determining this and the rule cannot be rigidly applied.

Would the decision have been different if the break was unconditional? Possibly. Does this case break any new ground? Possibly not.

However, it is a reminder to get your drafting right. It might also be an indication that the courts will not support landlords seeking to challenge break options on a mere technicality. This tenant got a lucky break, but others might not find such favour.

If in doubt, follow that break clause to the letter, no matter how illogical and meaningless it might be.