Question: Will a tenant who fails to comply with a condition of a break clause always lose that break as a result?
Miriam Seitler argues that there are five reasons why a tenant who fails to comply with a condition attached to a break will always lose that break as a result:
1 Because a break is in the nature of an option. The party with the benefit of the break has the option to bring about an early termination. It is settled law that, where a person has the benefit of an option which is exercisable on certain steps being taken, it must be exercised in strict compliance with the requirements set out for such exercise, ie strictly within the time and in the form stipulated, with all conditions precedent having been met: see West Country Cleaners (Falmouth) Ltd v Saly [1966] 119 EG 563and Stait v Fenner [1912] 2 Ch 504.
Strict compliance with the precise terms of a break clause is therefore required on the part of a tenant if that break clause is to be operated effectively: see also Dun & Bradstreet Software Services (England) Ltd v Provident Mutual Life Assurance Association [1998] 2 EGLR 175.The position can be summed up in the words of Windeyer J in the unreported Supreme Court of New South Wales case of Burrell v Cameron (SCNSW, 4 April 1997), where he said: “In the sphere of options, it is a cold hard world.”
2 Because it is essential to know when a break notice expires. In commercial leases, most break clauses require the service of the break notice and the consequent termination of the lease to occur on or by a specified date.
In those circumstances, it is critically important that a condition requiring the break notice to be exercised by a particular date is satisfied. Otherwise nobody knows when the term comes to an end: see United Scientific Holdings Ltd v Burnley Borough Council [1977] 2 EGLR 61.
3 Because this has never been about fairness. All the cases show that the court will usually uphold the need for strict compliance even where it seems unfair to do so. In Avocet Industrial Estates LLP v Merol Ltd [2012] 1 EGLR 65, the tenant lost its right to break because historic late payments of quarterly rent had generated about £130 of undemanded contractual interest.
At the time of service of the break notice, neither landlord nor tenant would necessarily have known about the interest, but it was enough to lose the tenant its ability to break, the clause being subject to a proviso that it would be of no effect where any payment due under the lease had not been paid at the break date.
In Osborne Assets Ltd v Britannia Life Ltd (unreported, 1997), a tenant lost its break because the lease required the premises to be painted with three coats of good quality paint in the final year of the term. The landlord’s counsel Peter Smith QC (as he then was) ferreted out the decorators’ invoice: it mentioned only
two coats and the tenant lost its break.
In Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd [2006] EWHC 1008; [2007] PLSCS 12, Lewison J said that “there is no room for general considerations of fairness or conduct” in the context of an assessment as to whether the conditions attached to the valid exercise of a break clause had been met.
A break is normally a very valuable right and it is only sensible and commercial that a landlord should be able to incentivise a tenant to comply with its terminal obligations
4 Because even if it was about fairness (which it is not), it is fair to require a tenant to comply with a condition attached to a break clause.
A break is normally a very valuable right and it is only sensible and commercial that a landlord should be able to incentivise a tenant to comply with its terminal obligations by making them a condition of the exercise of that right. Further, the condition attached to the break has necessarily been agreed to in the first place by the original tenant or the successor tenant on assignment of the leasehold term to it.
5 Because any tenant who agrees to exacting conditions on its right to break only has itself to blame. A tenant in a decent negotiating position these days (as opposed to 20 years ago – see Bairstow Eves (Securities) Ltd v Ripley [1992] 2 EGLR 47) – would not agree to wide-ranging conditions, such as a need on the tenant’s part to have complied with all the tenant’s obligations under the lease before being able to exercise the break.
Jonathan Seitler argues that there are five reasons why a tenant who fails to comply with a condition attached to a break still might have room for manoeuvre and be able to save that break:
1 Because, in modern leases, vacant possession is usually the only condition attached to the break. In that situation, strict compliance with the condition does not mean that the tenant has to leave the premises 100% pristine to satisfy the condition. Note, though: this is not a relaxation of, or exception to, the rule that there must be strict compliance with conditions attached to break clauses. It simply follows from the fact that (subject to the somewhat controversial decision in Riverside Park Ltd v NHS Property Services Ltd [2016] EWHC 1313 (Ch); [2016] PLSCS 222) vacant possession only means free of people and empty of chattels and free of legal interests which substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property: see Ibrend Estates BV v NYK Logistics (UK) Ltd [2011] EWCA Civ 683; [2011] 3 EGLR 1. Vacant possession, on this basis, is therefore necessarily not an absolute requirement.
2 Because even if the condition attached to the break clause is related to the tenant’s compliance with covenants, it is usually qualified in some way. For instance, that the tenant only need “substantially”, “materially” or “reasonably” comply with its covenants under the lease. In that event, the test will be an objective one, assessing whether any breach has in fact inhibited the landlord from re-letting or re-selling without delay or expenditure: see Fitzroy House Epworth Street (No 1) Ltd v The Financial Times Ltd [2006] EWCA Civ 329; [2006] 2 EGLR 13.
That gives the tenant quite a lot of leeway. Even where the covenant is not expressly qualified, not all breaches of covenant will put the tenant in breach of a condition of the break: a “spent” breach that has since been remedied will not put a tenant in breach of the conditions of the option (see Bass Holdings Ltd v Morton Music Ltd [1987] 1 EGLR 214, where it was held that the landlord must have a subsisting cause of action for more than just nominal damages in order to put the tenant in breach).
Further, a court will sometimes imply into the relevant covenant a reasonable period to find and rectify the breach. In West Middlesex Golf Club Ltd v Ealing London Borough Council [1993] EGCS 136, where minor damage had been caused to the premises by vandals near the end of the term, the court held that the tenant was not in breach at the time because the reasonable period had not passed.
3 Because defects in break notices can be waived by a careless landlord, even after service of the defective notice. In MW Trustees Ltd v Telular Corporation [2011] EWHC 104 (Ch); [2011] PLSCS 46, a landlord was stopped from challenging a tenant’s break notice on the ground that it had not been validly served because it had already accepted the notice’s validity in an e-mail. Beyond waiver, Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; [1997] 1 EGLR 57 qualifies the need for precision in notices. For example, even where the notice is given by a party other than the tenant (usually a subsidiary company) it will be valid if a reasonable recipient would have understood the notice to have been served on behalf of the tenant: see Lemmerbell Ltd v Britannia LAS Direct Ltd [1998] 3 EGLR 67.
One day somebody is going to blow the whistle on this whole strict compliance gig. They will do this by successfully arguing that a duty of good faith is implied into leases
4 Because conditions attached to break clauses are usually for the landlord’s benefit. Therefore, even if such conditions are not formally construed contra proferentem against the landlord (as in Dann v Spurrier (1803) 3 Bos & P 399), at the very least modern principles of construction require a landlord to have set out that a particular requirement is a condition of the break if it is to be treated as such: see Goldman Sachs International v Procession House Trustee Ltd [2018] EWHC 1523 (Ch); [2018] EGLR 33, where the court interpreted the lease to mean that the condition of the tenant’s break consisted only of giving vacant possession and not the more detailed and onerous obligations in a separate clause.
5 Because one day somebody is going to blow the whistle on this whole strict compliance gig. They will do this by successfully arguing (i) that a duty of good faith is implied into leases; and (ii) that a landlord’s insistence on strict compliance with a condition attached to a break that makes little or no commercial difference – the two coats of paint story is the perfect example – is not an exercise of good faith. (For more on good faith, see: www.egi.co.uk/legal/potted-guide-how-important-is-good-faith)
Miriam Seitler is a barrister at Landmark Chambers and Jonathan Seitler QC is a barrister at Wilberforce Chambers
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