There has been a flurry of cases over the last year or so highlighting the difficulties encountered by tenants in serving valid break notices. In three of the most significant, Prudential v Exel UK,1 Orchard Developments v Reuters 2 and Hotgroup v Royal Bank of Scotland,3 the notice was found by the court to be invalid and the leases therefore continued. Now a new case can be added to the list: MW Trustees Limited, Robert Posel and Pamela Posel v Telular Corporation,4 a first instance decision. Unlike the previous three cases, the court held that the lease had been successfully terminated, not because the break notice was correct but because the landlord had waived its deficiencies or, in the alternative, was prevented by its conduct from claiming that the notice was invalid.
Before considering that case in detail, it is useful briefly to set out the legal framework relating to the service of tenants’ contractual break notices.
The law is governed by both statute and case law.
The Law of Property Act 1925 sets out circumstances in which service of notices will be deemed to have been validly effected. The relevant section5 is permissive in nature, so that a party serving a notice can elect to serve by another method, but must prove that the notice was received by the intended recipient and received in time. However, the section may be excluded or, more usually, varied by the parties to the lease. If excluded, case law applies.
The key case is the decision of the House of Lords in Mannai Investment Company Limited v Eagle Star Life Assurance Company Limited.6 This created a watershed in the interpretation of notices7 and concerned the service of a break notice by a tenant to terminate two leases, which specified 12 January 1995. In fact the break option in each lease specified the break date as the third anniversary of the commencement date of the term, which was 13 January 1995. The case split the Law Lords 3:2, but they held that the construction of a notice had to be approached objectively, taking into account all the background information and the purpose of the notice, which is to inform the landlord that the tenant wishes to determine the lease in accordance with their right to do so. The court said that the test to be applied to any notice was whether the reasonable recipient of the notice, with knowledge of the lease and the break clause, would have been misled. In general, therefore, the actual understanding of the parties, to borrow a phrase from Lord Clyde, “is beside the point” unless and until an estoppel issue arises.
On the facts, since it was obvious to a reasonable recipient, with knowledge of the leases, that the tenant wished to break the leases on the third anniversary date in accordance with the break clause, the reasonable recipient would not have been perplexed by the tenant’s minor error in giving the wrong date in the notices. Accordingly, the notices were held valid.
In order to understand how this principle applies in practice, one can do no better than look at the words of Lord Hoffman:
“It is a matter of constant experience that people can convey their meaning unambiguously although they have used the wrong words… No one, for example, has any difficulty in understanding Mrs Malaprop. When she says “she is as obstinate as an allegory on the banks of the Nile”, we reject the conventional or literal meaning of allegory as making nonsense of the sentence and substitute “alligator” by using our background knowledge of the things likely to be found on the banks of the Nile and choosing one which sounds rather like “allegory”… We use the same process of adjustment when people have made mistakes about names or descriptions or days or times because they had forgotten or become mixed up… If one applies that kind of interpretation to the notice in this case, there will also be no ambiguity. The reasonable recipient will see that in purporting to terminate pursuant to clause 7(13) but naming 12 January 1995 as the day upon which it will do so, the tenant has made a mistake…. He will therefore understand the notice to mean that the tenant wants to terminate on the date on which, in accordance with clause 7(13) he may do so, i.e. 13 January.”
Lord Hoffman went on to state that if the clause had said that the 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.” Therefore, not all mistakes in the exercise of break notices are irrelevant on the basis that it is almost inconceivable that the recipient will be misled.
In the Court of Appeal case of Lemmerbel Limited v Britannia LAS Direct Limited 8 the court found it “impossible as a matter of construction to cure what we now know to be the defect.” It held that the notices served were invalid because they were not served by the correct tenant. The notices did not contain a mere slip that was obvious to the reader, when read in context.
By requiring interpretation of each notice against the contextual background, Mannai opened up the doors for litigation on whether or not a notice is misleading. MW Trustees Limited, Robert Posel and Pamela Posel v Telular Corporation is a timely reminder of how costly it is to get things wrong.
Telular had a 10 year lease with a break option allowing the tenant to terminate the lease on 1 March 2010 by giving not less than six months notice in writing to the landlord. The service provisions, which included special delivery and delivery by hand, stated that such notice would only be valid if served in accordance with its terms. As the landlord was a company, the notice had to be sent to its registered office.
The original landlord had been a company called Manhattan Securities Limited. During the term of the lease, the landlord’s interest changed hands several times. The transfer to MW Trustees (as trustees of Mr and Mrs Posel’s pension fund) was registered at the Land Registry. Its agents Mattioli Woods Plc notified Telular by email of the change in landlord.
Telular was based in Chicago and, having ceased to occupy the premises as part of a business reorganisation, decided to operate the break option. Unfortunately, Telular’s Director of Administration, Ms Voltz, was tasked with service of the break notice. She was unaware of the change in landlord. On 10 August 2009 she sent a break notice to MW Trustees’ predecessors, SLA, by special delivery post. It was accepted by the parties that the method of service used complied with the lease provisions, but that the notice was invalid because it was not sent to the correct landlord. Had the matter rested there the notice would have been invalid but subsequent events presented a different position.
On 13 August, a property administrator at SLA emailed Ms Voltz back, informing her that the landlord’s interest had been transferred by SLA the previous year. The administrator incorrectly informed her that the transferee was Mattioli Woods, that is, the managing agents. The same day, Ms Voltz emailed the second claimant, Mr Posel, a copy of the notice, explaining what had happened and asking him to let her know the necessary steps required to terminate the Lease on the Break Date.
Mr Posel replied, copying in Mattioli Woods, that he had forwarded her email to them and that they would be in contact.
On 17 August, Mattioli Woods sent Ms Voltz a “crucial email”, which read:
“We accept the attached letter and can confirm we are happy for you to break the lease, however please could you re-address this letter to the following address [address supplied]. I look forward to hearing from you soon…”
That email was also copied to Mr Posel who, on the same day, emailed Ms Voltz acknowledging Mattioli Woods’ response and asking her for details of Telular’s subtenant and sublease. The Judge took this to mean that the landlord was acknowledging that they expected the lease to terminate and were investigating the prospects of avoiding a rental void.
Whilst Ms Voltz prepared the suggested replacement notice, there was no evidence that it had been sent and, accordingly, there was no evidence before the court that it had been served.
The parties agreed that this exchange of emails did not constitute a notice which complied with the lease provisions. One reason was that the notice was not “addressed” to the landlord. However, Telular argued that the crucial email waived any defect in the notice or, in the alternative, MW Trustees were estopped from denying that valid notice had been given. MW Trustees argued that the words “however could you please re-address this letter to the following address…” showed that they still required “something more proper” to effect the break. As this had not occurred, the lease still continued.
The Judge did not agree with the parties that the notice had to be addressed to the landlord. He commented on a non-binding basis that, had the form of the notice been vital, he would have applied the Mannai principles to conclude that a reasonable recipient would not have been misled. This appears to ignore Lord Hoffman’s blue paper illustration of when Mannai cannot assist. It would, therefore, be dangerous to rely on these comments.
As regards waiver by behaviour, the parties’ subjective intentions become important and these must be considered. Peter Smith J concludes that MW Trustees knew what Telular was intending to do because Mr Posel raised an issue about the subtenants. The Judge concluded that there had been a waiver because the crucial email expressly stated that the notice was accepted. That could not be undone by later asking for the notice to be readdressed to MW Trustees because that implied that the notice was not accepted, which was inconsistent with the express words used. Telular then relied on it. MW Trustees had no duty to acknowledge receipt of the notice. Thus, he found that Telular was entitled to conclude that MW Trustees accepted the earlier documents as being effective to terminate the Lease, but required service of a further document for reasons which were unexplained.
The Judge clearly thought the crucial email was unequivocal in its meaning. However, where there is ambiguity in a representation, a claim based on estoppel will fail. Arguably, stating both that the notice is “accepted” and that a fresh notice must be sent creates ambiguity and thereby raises a question mark over the correctness of the decision.
Landlords and tenants should all take note of this cautionary tale.
Tenants should take legal advice to ensure the valid operation of a break option because the consequences of getting it wrong can be disastrous. In the event, Telular was lucky. Had MW Trustees declined to respond and had no further notice been sent, the lease would not have been determined. Despite its success at trial, the case took 11 months to reach trial at no doubt considerable expense to the tenant (even after recovery of most of its costs).
Where landlords receive potentially defective break notices, they should take legal advice. It might be wise to refrain from engaging with the tenant until after the last date that the tenant can serve a valid notice.