Landlord and tenant – Lease of commercial premises – Break clause – Respondent giving notice to terminate lease pursuant to break clause – Whether notice effective to terminate lease – Whether invalidated by failure to comply with requirements of break clause – Appeal allowed
The appellant was the landlord and the respondent was the tenant under a lease of business premises in Crawley, West Sussex, for a term of 25 years from August 1998, granted pursuant to an earlier agreement for lease made in August 1997. A tenant’s break clause entitled the respondent to terminate the lease in August 2013 by giving at least six months’ notice, “ which notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954”.
In September 2012, the respondents gave notice to terminate the lease in August 2013; however, the notice did not state that it was given under section 24(2) of the 1954 Act or even refer to that Act. The appellant argued that the notice was ineffective to terminate the lease since it did not comply with the requirements of the break clause.
In proceedings against the appellant, the respondent contended that the notice was effective, despite the absence of the prescribed reference to section 24(2), since there was, in law, no such thing as a notice under section 24(2) and the required reference was therefore meaningless. Allowing the claim, the judge held that, although the notice did not comply with the break clause, it was not invalidated by the failure to state that it had been given under section 24(2) of the 1954 Act. He held that there could not realistically be attributed to the parties an intention to make the tenant’s exercise of an important right dependent on compliance with a meaningless formula: see [2013] EWHC B15 (Ch); [2013] PLSCS 164. The appellant appealed.
Held: The appeal was allowed.
(1) The formulation of the break clause was intended to prevent a tenant of business premises from exercising that clause by serving a statutory request for a new tenancy under section 26 of the 1954 Act, rather than a contractual break notice, so as to engineer a downwards rent review in a falling market: see Scholl Manufacturing Co Ltd v Clifton (Slim-Line) Ltd [1967] Ch 41. Section 24(2) preserved the tenant’s ability to terminate a lease protected by the 1954 Act by serving a notice to quit, which included a break notice. The reasoning behind the requirement in the break clause was that, by requiring the tenant to give notice to quit as contemplated by section 24(2), the problem of the downwards rent review was avoided. The law had subsequently been clarified in Garston v Scottish Widows Fund & Life Assurance Society [1996] 1 WLR 834; [1996] 1 EGLR 113; [1996] 23 EG 131, upheld by the Court of Appeal at [1998] 1 WLR 1583; [1998] 2 EGLR 73; [1998] 32 EG 88, establishing that where a lease for a fixed term also contained a tenant’s break clause, the tenant could not make a request for a new tenancy under section 26 if the date of termination was earlier than the date on which the lease would have expired by effluxion of time at common law; the “downwards rent review” problem was thus removed. However, the agreement for lease in the instant case had been made before the Court of Appeal decision in that case.
(2) Where a party had a unilateral option, which prescribed substantive conditions that had to be fulfilled before the other party’s obligations were triggered, then those conditions had to be fulfilled completely; substantial fulfilment was not enough. An option to terminate a lease fell into that category. Consequently, even trivial non-compliance with a condition on which the exercise of a break clause depended would preclude its successful exercise. There was no authority for the proposition that there was a species of permitted non-compliance with the formal requirements of a clause prescribing the method of exercise of an option: United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74, United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904; [1977] 2 EGLR 61; (1977) 243 EG 43 and 127, Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 949; [1997] 1 EGLR 57; [1997] 24 EG 122; [1997] 25 EG 138 and Newbold v Coal Authority [2013] EWCA Civ 584; [2013] RVR 247; [2013] PLSCS 115 applied; Yates Building Co Ltd v RJ Pulleyn (York) Ltd [1976] 1 EGLR 157; (1975) 237 EG 183 and Rennie v Westbury Homes (Holdings) Ltd [2007] EWCA Civ 1401 distinguished.
Properly construed, the break clause imposed a mandatory requirement that the notice “must” be expressed to be given under section 24(2); that requirement could not be relegated to a merely permissive provision. Consequently, the judge had erred in holding that the respondent’s failure to comply with the requirements of the break clause did not invalidate its break notice: Petch v Gurney [1994] 3 All ER 731 applied. The fact that the parties had not explicitly prescribed the consequences of a failure to comply with the formal requirements of the break clause did not mean that the court was free to do so. Instead, the common law supplied the answer; if a purported exercise of an option failed to satisfy both the formal and substantive requirements of the clause, it would be ineffective. It made no difference that the respondent’s notice might have achieved the purpose underlying the requirements of the break clause. In the field of unilateral contracts, there was no room for the notion of substantial compliance.
Mark Wonnacott QC (instructed by King & Wood Mallesons LLP) appeared for the appellant; Timothy Fancourt QC and Tom Weekes (instructed by Penningtons Manches LLP) appeared for the respondent.
Sally Dobson, barrister
