Friends Life Ltd v Siemens Hearing Instruments Ltd [2014] EWCA Civ 382

In this case, the Court of Appeal held that a notice purporting to exercise a break clause in a lease was ineffective as it failed to include the exact wording specified in the lease.

Facts

A lease was granted by Friends Life Ltd, the Landlord, to Siemens Hearing Instruments Ltd, the Tenant, on 27 January 1999. The term was for 25 years from and including 24 August 1998.  Clause 19.2 of the Lease contained a break clause which stated that “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 inclusion of the provision requiring the notice to be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954 (“LTA 1954”) was believed to be included in an attempt to ensure that the Tenant could not exercise the break and subsequently request a new tenancy under section 26 of the LTA 1954.

In September 2012 the Tenant’s solicitors served a notice on the Landlord (the “Notice”) indicating an intention to terminate the lease. The Notice referred to Clause 19 of the Lease, but it did not state that “the notice was given under section 24(2) of the LTA 1954”, as required by Clause 19.2.

The High Court

The High Court held that the Notice was still valid, despite the fact that it failed to comply with the requirement in the Lease to refer to section 24(2) of the LTA 1954. They held that the break clause was part of a well-drafted lease and that a failure to refer to section 24(2) of the LTA 1954 in the Notice was not fatal to the break notice. Further, the Court held that the omission of the reference to section 24(2) of the LTA 1954 made no difference to the Landlord. Accordingly, whilst the Notice was clearly defective, the defect did not render it invalid.

The Landlord appealed the High Court’s decision.

The Court of Appeal

The Court of Appeal unanimously allowed the Landlord’s appeal and held that the Notice was ineffective as it did not comply with all the requirements clearly stated in the Lease.

In reaching a conclusion, the Court held that the break clause equated to an option to the tenant to break the Lease and it was therefore a unilateral contract (sometimes known as an “if” contract). The Court held that it was a well-established principle that in the case of a unilateral, or “if”, contract, such as an option, the terms of exercise had to be fully complied with if it is to be turned into a binding contract. In support of this position, the Court referred to the case of Mannai Investment Co Ltd v Eagle Star Life Assurance [1997] AC 749 in which Lord Hoffman confirmed 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”.

The Court held that the wording of Clause 19.2, and in particular the use of the word “must”, was emphatic and imperative and on this basis any notice to break the Lease must state that it is exercised pursuant to section 24(2) of the LTA 1954. The Court held that it was insufficient and irrelevant that the Notice had, in effect, complied with the substantive provisions of Section 24(2) LTA 1925. What was necessary was that it complied with the formal requirements of Clause 19.2

The Court concluded that in the field of unilateral contracts (including options) there is no room for the notion of substantive compliance. The purported exercise of the option will either satisfy the formal and substantive provisions of the clause, or it will not. If it does not, then it is simply ineffective. In light of this, the Court concluded that the Notice was invalid and that the appeal must succeed.

Conclusion

The Court of Appeal made patently clear that if a party fails to comply with a mandatory requirement of a break clause, or any option, this will render it invalid. Lord Justice Lewison concluded his judgment in this case with the following advice “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, including the formal requirements, and follow them precisely”. Tenants, and practitioners, should take on board Lord Justice Lewison’s advice and ensure that any break notice is tailored to comply with the exact wording of the lease.