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

Summary

The Court of Appeal has held that a tenant's break notice was invalid, as it did not comply precisely with the mandatory requirements of the break clause in the lease.

The decision is further confirmation in a line of recent decisions that tenants must take great care when seeking to exercise a break option.  The Court of Appeal has confirmed that break options are "if contracts" and exact compliance with their terms is essential.  This decision illustrates that non-compliance with a condition on which the exercise of a break clause depends will preclude its validity, even if it is very minor or trivial in nature.

The facts

The Tenant had a lease of commercial premises in Crawley. The lease was granted on 27 January 1999 for a term of 25 years.

Clause 19 of the lease contained a tenant-only break clause. This break option enabled the Tenant to terminate the lease on 23 August 2013 by giving the Landlord "not more than 12 months' and not less than six months' written notice", provided that the pre-conditions in clause 19.3 of the lease were satisfied.

These pre-conditions included a requirement that any break notice given by the Tenant "must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954" ("the Act"). The lease contained this wording because, at the time it was granted, it was thought that this mechanism would be necessary to prevent the Tenant from using the break option to engineer a downward rent review in a falling market. However, case law in the interim found that this would not work, and so the requirement had become obsolete.

In September 2012, the Tenant served notice on the Landlord to exercise the break option and terminate the lease.  The notice did not confirm that it was given under section 24(2) of the Act and, in fact, made no reference to the Act at all.  In all other respects, it complied with the requirements of the lease. The Landlord argued that the notice was invalid because it did not refer to the Act.

The first decision

At the initial hearing, the Court found in favour of the Tenant, and held that the notice was valid. This was despite the fact that it did not comply with the pre-conditions in the lease. The judge found that the missing wording was not sufficient to invalidate the notice for a number of reasons:

  1. It was necessary to look at the compliance rule relating to options. If this was applied strictly, it would mean that any breach, however, trivial, would be fatal. However, this should only be the case for some options, not all of them, depending on their wording.
  2. The lease had been carefully drafted. It contained express requirements, but did not go on to say that failure to comply with those requirements would be fatal. Therefore it had been left to the Court to decide whether the notice should be effective or not in the light of any non-compliance.
  3. Failure to use the prescribed wording in the notice made no difference at all.
  4. The use of the word "must" in the lease was not an indispensable condition and did not mean that failure to comply would invalidate the notice.  In these circumstances, it would not be a sensible construction of the lease to hold that the use of the required words was mandatory.

The Landlord appealed the decision.

The issues

The Court of Appeal had to consider:

  1. Was the break notice valid, notwithstanding that it did not comply with the strict requirements of the lease?
  2. Where an option is subject to substantive conditions, must those conditions be fulfilled   entirely? Or will substantial fulfilment be sufficient?

The decision

The Court of Appeal found in favour of the Landlord and allowed the appeal, saying that the notice was invalid and thus the break option had not been exercised. This was for the following reasons:

  1. The requirement for the break notice to refer to the Act was mandatory and failure to comply meant that the break notice was invalid. 
  2. There is a very well-established principle that, in the case of a unilateral contract - such as an option - the terms of exercise have to be met strictly.
  3. A break right is an option. The grant of an option is an irrevocable offer and, in order for that offer to be turned into a binding contract, it must be accepted in exact  compliance with the terms prescribed by the contract. 
  4. The original judge had not sufficiently appreciated the nature of a unilateral contract. There was no way that a requirement saying that notice "must" be expressed in a particular way could be relegated to a permissive provision.
  5. If this were the case, it would not just be restricted to compliance with conditions about the content or form of notices. Instead, it could be extended to apply to all sorts of failures to comply with other conditions.
  6. The Tenant's argument that there was "sufficient" compliance was not accepted.  The Court of Appeal confirmed that, if the exercise of an option does not satisfy both the formal and substantive provisions of the clause, it will be ineffective. There is no room in the arena of unilateral contracts for the concept of sufficient compliance. Either the relevant event has occurred or it has not. There is no halfway house of "it has partially occurred", or even "it has almost occurred."

The Court of Appeal re-iterated the famous statement from Lord Hoffman in Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749 that if a clause required a notice to be on blue paper, it would be invalid if served on pink paper, no matter how clear it may have been that the tenant wanted to terminate the lease.

Lewison LJ concluded with a message for both landlords and tenants to commit to memory:

…"The clear moral is: 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" …

Our advice for landlords

This decision will assist landlords where tenants are trying to terminate leases.

If a tenant serves a break notice, seek early advice on the validity of the notice and the pre-conditions of the break option. Even a minor omission can be sufficient to defeat the exercise of the option.

Our advice for tenants

This is another decision in a long line of recent cases that highlights how essential it is to seek early advice on the exercise of a break option. 

North of the border in a persuasive Scottish case, the Court of Session in Edinburgh has just found that a tenant is liable to pay rent until 2023 at around £750,000 a year after it failed to meet its repair obligations prior to seeking to exercise the break clause. 

It is therefore essential to comply with all the requirements of a break clause, no matter how trivial they may appear to be.