Landlord and tenant – Lease – Break clause – Defendant company acquiring sublease to part of land from company – Company subsequently demising entire plot of land to claimant – Defendant purporting to exercise break clause in lease by serving notice on original landlord – Whether defendant successfully operating break clause – Declaration granted
A trust company (Capita) had granted the defendant a sublease of part of a plot of land for a term of 10 years from February 2004. The lease described Capita as the landlord and the defendant as the tenant.
In order to exercise the break clause in the lease, the defendant had to give notice to the landlord. Capita subsequently demised the overriding lease to the claimant, to which the defendant then paid rent. In July 2008, the defendant served a notice on Capita to exercise the break clause. It sent a copy of the notice to a company (J), acting as agent for Capita. After the last date on which the break clause could have been exercised, the defendant sent a copy of the notice to the claimant, which considered itself to be the landlord and that the defendant should have sent notice on it in accordance with the sublease.
The defendant contended, inter alia, that either or both of the communications of July 2008 were valid notices exercising the break clause since: (i) Capita had been defined in the lease as “the landlord”, which continued to apply even after it had ceased to hold the immediate reversion; (ii) to hold that notice should have been served on the current landlord was inconsistent with the wording of the definition; and (iii) service on J as the claimant’s agent constituted good service and a reasonable recipient of the notice in the agent’s position would have known that the reference to Capita was an obvious mistake.
The claimant applied to the court for a declaration that neither of the communications of July 2008 was effective to determine the lease.
Held: The declaration was granted.
The expression “break clause” described a right by written notice to terminate a lease on a date, usually called “the break date”, where in the absence of such a notice the lease would endure beyond the break date. Such a right was annexed to the lease or reversion and normally passed to an assignee. In the ordinary way the purpose of the tenant’s break clause was to enable the tenant in possession to terminate the relationship of landlord and tenant. The party entitled to exercise the right was usually the party in which the legal estate was vested: Norwich Union Life & Pensions v Linpac Mouldings Ltd [2009] EWHC 1602 (Ch); [2009] 3 EGLR 147.
The parties must be taken to have contemplated that the landlord might change. Not only was that part of the legal background to the grant of any lease, it was demonstrated by the terms of the lease. At common law, a notice to quit had to be given to the party that held the immediate reversion. Where the original landlord was granted a concurrent or overriding lease, the holder of the immediate reversion was the lessee under the concurrent or overriding lease. Thus, at common law, any notice to quit would have to have been served on the claimant, rather than on Capita. In addition, under section 3(l) of the Landlord and Tenant (Covenants) Act 1995, the benefit of all the tenant covenants of the tenancy were annexed to that reversion and passed on the assignment of that reversion. The party entitled to enforce the covenant was the reversioner for the time being: see section 3(3)(b) of the 1995 Act.
The lease required the rent to be paid to the landlord, but that could only be the landlord for the time being. One of the conditions that applied to the exercise of the break clause was the giving of vacant possession, which could be given only to the current landlord. It could not have been contemplated that the tenant could simply vacate the premises and return the keys to the landlord without having given it notice of its intention to do so.
Moreover, the lease provided that the defined term applied unless the context otherwise required. The immediate context was the giving of notice to terminate the lease. In that context and against the background of the common law, the term “landlord” had to be given the meaning of the holder of the current reversion. Thus, the only party on which a valid notice could be served was the claimant and the notice sent to Capita was therefore ineffective.
If the reasonable recipient had looked at the lease on receipt of the notice, it might have formed the view, as had the defendant’s solicitor, that Capita was the right party on which the notice had to be served. In the light of the unambiguous wording of the notice and of the covering letter sent to J, it was impossible to conclude that the reasonable recipient of the letter and the notice would have understood that them to have been addressed to the claimant. Strict compliance with the conditions for exercising an option such as a break clause was vital; that had always been the law. In addition, fairness required strict compliance with contractual stipulations. The exercise of a break clause had important consequences for both landlord and tenant and there were powerful policy considerations for certainty in that area of the law. In those circumstances, neither of the communications of July 2008 was effective to determine the lease: R (on the application of Morris) v London Rent Assessment Committee [2002] EWCA Civ 276; [2002] 2 EGLR 13; [2002] 24 EG 149 considered.
Mark Warwick (instructed by Addleshaw Goddard LLP, of Manchester) appeared for the claimant; Jonathan Seitler QC (instructed by Freeth Cartwright LLP, of Nottingham) appeared for the defendant.
Eileen O’Grady, barrister
