A break clause in a lease gives one or both parties the right to terminate the lease before the expiry of the term. Before 1997, the law was strict but straightforward; any errors in the content of the break notice would invalidate it. Mannai Investment Co Ltd v Eagle Star Assurance Co Ltd rewrote the status quo by ruling that errors in content would no longer automatically invalidate a break notice. An inaccurately drafted break notice will still be effective provided that its meaning is clear, the mistake is obvious and a reasonable recipient can safely rely upon it. This more qualified approach has led to an increase in uncertainty and litigation over the validity of break notices. Matt Garrod and Louise Green
review the key points and pitfalls to consider.
When the potential impact of a break is considered, not least during the tougher climates of recent years, this is far from surprising. For tenants, the break clause provides an opportunity to dispose of possibly overrented or surplus premises, or renegotiate a lease in their favour. For landlords, resisting the early termination of a lease can mean the difference between a profitable and a vacant property. Regardless of your perspective, recent case law has highlighted the pertinence of serving an effective break notice.
What’s in a name?
The potential success or otherwise of a break notice! It is essential that the break notice is exercised by the legal tenant upon the legal landlord. What seems a basic issue has been the principal cause of litigation due to confusion over matters such as agents, assignments and joint tenants. Such confusion can be avoided by checking the deeds, official registers,
all records and, when in any doubt, by seeking confirmation of the relevant party. If doubt still remains, break notices should be served on a number of potential landlords as a ‘belt and braces’ exercise.
Back to basics
A break notice must comply with any express provisions set out in the lease. No matter how clear a notice may be it will not be valid if the lease demands a criterion that is not met. As Lord Hoffman surmised in Mannai: “If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might
have been that the tenant wanted to terminate the lease.” An example of this is the timing stipulated within the lease, if insufficient notice is allowed under the terms of the lease the break will fail.
Express provisions may be included which stipulate conditions that the tenant must meet in order to exercise a break notice e.g. compliance with tenant’s covenants. These can often trip the tenant up – it is incredibly difficult to ensure there is no breach of the repairing covenants. As a result conditions in such a Tenant friendly market are currently being used less. Perhaps this suggests that whilst this is common place at the moment it is only because of the market and by inference if not in a strong position conditions will remain. The Code for Leasing Business Premises (click here to visit the site) suggests that the only conditions should be paying a) the main rent and b) giving up occupation on the break date with no continuing sub-leases. Leases can also prescribe how a break notice must be served. In Hotgroup plc vs Royal Bank of Scotland plc the tenant overlooked the fact that its lease required notices to be served on a third party in order to be valid; failure to do so meant that the tenant had not correctly broken its lease.
If the worst has happened and an incorrect party features in a notice, it does not automatically invalidate the break. The Mannai test applies and validity will depend upon whether a reasonable landlord would have been misled by the error. A common example is when a break clause is personal and can only be exercised by the named tenant. Service in the incorrect name would not invalidate the notice as the Landlord could be in no doubt that there was only one tenant who could serve the break.
Various recent cases illustrate the importance of complying with the letter of the break clause provisions in the lease. In the case of Prudential Assurance Company Ltd v Exel UK Ltd (2009), the lease was granted jointly to two tenant companies - Excel UK Limited and Britten Consumer Group Ltd. The tenant’s solicitors served a break notice on the landlord
but only stated Excel UK Limited as the tenant. The Court held that the landlord would have been misled by the error in the notice and concluded that the notice was invalid.
In the case of Standard Life Investments Property Holdings Ltd v W & J Linney Limited  the tenant served a break notice on the landlord stated in the lease – Capita Trust Company Limited. However, since the original grant of the lease, Standard Life had been granted an overriding lease making them the tenant’s immediate landlord. As a result, the
tenant should have served the notice on Standard Life. The Court, adopting a strict approach, disagreed and held that the notice was invalid.
Finally on 16 June 2011, the Court of Appeal decided that NYK Logistics (UK) Limited had not exercised their break clause correctly as there were workmen in their property after the break date and so they had not complied with the condition that they must given vacant possession. Click here to read more on this case. Remember, the devil is truly in the detail and the uncertainty of litigation means that meticulous care in exercising a break clause is the best and only way to ensure an effective break.
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