In the current climate, many tenants are looking to dispose of their leases. Where the lease contains a break clause, this may seem like an ideal way out. However, care must be taken to ensure that the break is operated effectively. This is particularly the case where there is a specified break date, rather than a rolling break. Disputes over the operation of break clauses often centre on whether the tenant has complied with the pre-conditions to the exercise of the break (for example, whether there are any breaches of covenant). However, it is just as important to get the procedural, as well as the substantive, conditions right.

In Orchard (Developments) Holdings Plc v Reuters Ltd, the only pre-condition to the exercise of the break (apart from service of notice) was that the tenant deliver vacant possession of the premises. In this the tenant must have considered itself lucky, for many leases contain detailed provisions regarding compliance with covenants, among other things. The tenant delivered vacant possession at the break date. However, the Court of Appeal ruled that the tenant had failed to serve an effective notice operating the break. This meant that the lease remained in place, with the result that the tenant was still liable for the rent.

The notices clause in the lease provided that:

"Unless the receiving party or its authorised agent acknowledges receipt a notice is valid only if it is given by hand sent by registered post or recorded delivery".

The break date under the lease was 30 January 2006. The break clause required six months' notice to be given. The tenant sent notices both by letter and by fax on each of 29 July and 30 July 2005. Unfortunately the notices served by letter were ineffective, as the process server had posted them in the wrong letterbox. The tenant therefore had to rely on the notices served by fax. Since this was not a notice given by hand, sent by registered post or recorded delivery, under the notices clause the notice had to be acknowledged by the landlord in order to be valid.

The tenant argued that the landlord had acknowledged receipt in a letter dated 8 December 2006, and that the notices had therefore retrospectively become effective. The Court of Appeal disagreed. It ruled that the notices could not be retrospectively validated by an acknowledgement made after the break date. Two of the judges also expressed their view (though not necessary to decide the case) that no valid acknowledgment could be made once the deadline for serving the break notice had passed.

Things to consider

The tenant argued that this decision allowed the landlord to frustrate the notices provision in the lease by refusing to acknowledge receipt. However, it was open to the tenant to use one of the more formal methods of service under the notice clause - which indeed it had tried to do.

Although not in issue in the case, one of the judges, in commenting on the notices clause, expressed the view that a notice given by hand required face-to-face delivery. This may come as a surprise to many lawyers, who would previously have drawn a distinction between service by hand (where it is commonly accepted that a notice can be posted through the letterbox), and personal service (where actual service on an individual is required). In light of the doubt cast by the judge's comments, it may be preferable for notices clauses to avoid the expression "by hand", but instead to permit service by leaving the notice at a particular address (e.g. the company's registered office).

Finally, one of the judges commented that the notices clause in the lease, which had been granted in 2001, "hardly does justice to the modern world of the fax and email". This may be true. However, there are practical issues over service by fax and email which means that care should be taken when agreeing to accept service by these methods.