In Siemens Hearing Instruments Ltd v Friends Life Ltd, the Court of Appeal has overturned an earlier decision and ruled that the formal requirements of a break clause must be followed precisely in order to determine a lease.
In 1999, Friends Life (the "Landlord") granted a 25 year lease of commercial premises to Siemens (the "Tenant"). The Tenant had the benefit of a break option the relevant part of which stated:
'Subject to the pre-conditions.being satisfied on the Termination Date.the Tenant may determine the Term on the Termination Date by giving the Landlord not more than 12 month's and not less than six month's written notice, which notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954.'
The Termination Date was 23 August 2013. The Tenant's solicitors wrote to the Landlord within the appropriate timescale and said:
'the Tenant intends to terminate the Lease on 23 August 2013 in accordance with clause 19 of the Lease so that the Lease will determine on that date'.
The Tenant's solicitors made no mention of section 24(2) of the Landlord and Tenant Act 1954 and - come 23 August 2013 - the Landlord refused to accept that the Lease had been validly determined.
Why did the break clause contain such a requirement?
The lease was entered into under an agreement for lease dated 1997. At that time, there was a fierce legal debate as to whether it would be possible for a tenant to serve a break notice and then serve a request for a new tenancy under the 1954 Act. A tenant might contemplate doing so for tactical reasons - such as a more favourable rent.
If a break notice - or notice to quit - were served under section 24(2) of the 1954 Act, the Act is clear that a tenant would not be entitled to make a request for a new tenancy. Therefore this wording was added into the lease as a protective measure for the landlord.
This legal uncertainty was tested before the Court of Appeal in 1998 and the court decided that a tenant was not entitled to make a request for a new tenancy, if the date of termination of the lease was earlier than its contractual expiry date - this would be the case on the exercise of a break option.
To apply this to the Siemens' case it meant that by the time that the break option was purportedly exercised on 28 September 2012, the requirement to refer to section 24(2) was meaningless.
At first instance, the High Court took a pragmatic view - although the Tenant's break notice failed to make reference to section 24(2) of the 1954 Act, it was still valid because
. The Tenant had substantially complied with the break clause of the lease and
. the omission of any reference to section 24(2) in its break notice caused no prejudice to the Landlord.
The Court of Appeal took a much stricter approach. A break option amounts to a unilateral contract. Essentially a landlord agrees that a lease can be determined if the tenant complies with certain terms. In order to turn it into a binding contract, the offer must be accepted in exact compliance with those terms. Substantial compliance is not enough. This being the case, the consequences of a failure to comply with the express terms should not be taken into account - it didn't matter that the reference to section 24(2) would have been meaningless.
When considering the question of whether the requirements of a break clause have been complied with, the only possible answers are "yes", or "no". It can not be answered "almost".
To illustrate this position, the Court of Appeal re-iterated the now famous remark of Lord Hoffman that if a clause said a 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.
What does this mean?
In its judgment, the Court of Appeal took the rare step of specifically highlighting the impact of this decision for tenants.
'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, and follow them precisely'
We are awaiting the Court of Appeal's decision in Marks & Spencer v BNP Paribas, a case which the High Court implied a term into a lease authorising the refund of rent where the break date fell between two quarter days. Will the court follow the High Court's tenant-friendly lead or take another landlord-centric approach? Watch this space.