Commercial premises — Tenancy — Break clause — Clause allowing tenant to terminate lease if repairing covenant materially complied with — Whether “material compliance” applying only to trivial breaches — Whether tenant successfully determining lease — Appeal dismissed
The appellants were the joint owners of commercial premises of which the respondent was the tenant under a 16-year lease from 1 April 1994. The lease contained a break clause allowing the respondent to terminate on notice so long as it had materially complied with all its obligations under the lease.
The respondent served a termination notice on 5 February 2003 seeking to break the lease on 1 April 2004. It undertook substantial works of renovation and repair to ensure that it had fully complied with the repairing covenants. It then purported to terminate by vacating the premises on the termination date. The appellants contended that the premises remained in disrepair, and that, in failing materially to comply with its obligations under the lease, the respondent was, and remained, in breach. The lease therefore continued.
The appellants sought declarations to that effect. They contended, inter alia, that the “material compliance” condition meant that there could be no such compliance unless the only breaches in existence on the break date were trivial, such as a missing screw.
The High Court dismissed the claim, declaring that the lease had been terminated pursuant to the February notice: see [2005] EWHC 2391 (TCC); [2006] 02 EG 112. The appellants appealed, contending that the judge had misdirected himself as to the correct test of material compliance. They accepted the judge’s findings of primary fact but argued that the evidence did not support some of the inferences that had been drawn as to the immateriality of breaches of the tenant’s covenants.
Held: The appeal was dismissed.
The judge had applied the wrong test and had taken account of irrelevant considerations: Commercial Union Life Assurance Co Ltd v Label Ink Ltd [2001] L&TR 29 disapproved. However, applying the right test, in the light of the findings of fact by the judge, the respondent had complied with its obligations as at the date of the purported termination of the lease.
The issue of material compliance had to be determined on an objective basis, and materiality had to be assessed by reference to the appellants’ ability to relet or sell the property without either delay or additional expenditure. Where the provision was absolute, any breach would preclude an exercise of the break clause, but there was no justification for attributing to the parties an intention that the insertion of the word “material” was intended to permit only trivial breaches. The meaning of those words was uncertain and they had not been used by the parties: Bass Holdings Ltd v Morton Music Ltd [1987] 1 EGLR 214 applied.
The issue in the present case was whether, notwithstanding the breaches identified, the tenant had materially complied with its obligations. Thus, it did not help to consider whether the use of the word “material” permitted more or different breaches than the commonly used alternatives “substantial” or “reasonable”. Depending upon the context, the words “substantial” and “material” were interchangeable, whereas “reasonable” connoted a different test: Finch v Underwood (1876) LRD 2 ChD 310 and Bairstow Eves (Securities) Ltd v Ripley [1992] 2 EGLR 47; [1992] 32 EG 52 considered.
Mark Warwick (instructed by Kanter Jules) appeared for the appellants; Paul Morgan QC (instructed by Wragge & Co LLP, of Birmingham) appeared for the respondent.
Eileen O’Grady, barrister
