Over the past 12 months, the Scottish courts have twice ruled that seemingly minor errors in the content or timing of notices can render them invalid, resulting in potentially huge unforeseen costs. Understanding the potential pitfalls can help you safeguard against them.
The dangerous temptation when serving notice under a contract is to assume that the Notices provision is a standard "boilerplate" clause which does not require further review. However, on two separate occasions this year, the Court of Session has examined the dangers of such an approach. In one case, such a mistake would have resulted in unplanned expenditure of over £2 million.
The commercial norm
In the vast majority of cases, a contract will contain provision for how the parties are to inform each other of any subsequent actings or decisions. In the case of a limited company this will often require notice to be sent recorded delivery to the company's registered office and it will usually be deemed to have arrived 48 hours after posting. The following two cases serve to highlight the dangers lurking in this seemingly benign clause:
Timing of notices
In Carmarthen Developments Limited v
Pennington, the courts examined the precise mechanisms of delivery
of notices. Carmarthen Developments had entered into a conditional
contract to purchase land from Mr Pennington. In terms of the
contract, the purchaser had until 19 October 2007 to confirm the
conditions had been satisfied, failing which the seller would be
entitled to walk away from the deal at any time –
provided that he did not receive prior notification that the
conditions had been satisfied.
In terms of the contract, notices
could be served:
- To the parties, or to their solicitors;
- By recorded delivery, by hand delivery, or by fax;
- If sent by recorded delivery, notice will be deemed to have been served two days after posting;
- If sent by fax between 9am and 5pm on a working day, notice will be deemed served upon full transmission;
- If sent by fax after 5pm, notice will be deemed served at 9am on the next working day.
The Facts
The purchaser's solicitors
prepared the relevant notice for transmission by fax on the morning
of Friday 19 October, with the original notice being sent by first
class post thereafter. Due to an oversight within the office, the
fax copy was not sent and only the first class post was used to
serve the notice.
In the background, meanwhile, the
seller had made up his mind to exercise his right to walk away as
soon as the longstop date of 19 October had passed. He instructed
his solicitor that, if the purchasers had not served their notice
by 5pm on Friday 19 October, then the seller's solicitor should
fax notice that the seller was exercising his right to bring the
contract to an end. His solicitor made special arrangements to send
the fax from his own office on Saturday 20 October.
The seller's solicitors mail was
not delivered to his office by the Royal Mail, but was collected
from the sorting office by the solicitor on his way to the office
each day.
The Implications
- The purchaser's fax copy notice was not sent and was therefore not validly served prior to close of business on Friday 19 October.
- The purchaser's original notice was not sent by recorded delivery and so there was no deemed time of receipt. Receipt of the notice would have to be a question of fact.
- The seller's faxed notice was sent outside working hours, and so could not be deemed to have been received until 9am on the following Monday.
If the seller's solicitor
received the purchaser's notice prior to 9am on Monday 22
October, then the purchaser's notice was served first and the
contract was binding.
If the seller's solicitor
received the purchaser's notice after 9am on Monday 22 October,
then the seller's notice was served first and the contract was
at an end.
After hearing evidence from the
relevant parties, the court held that the purchaser's notice
was served when it came into the seller's solicitor's
possession i.e. when he collected his mail bag from the sorting
office at 8.50am. Therefore, the purchaser had served notice that
the conditions were satisfied before the seller's notice had
been validly served and so the court found that the contract was
binding. The seller is therefore bound to convey the land to the
purchaser.
Timing of Notices - What you need
to know
If you are required to serve notice
by a particular date, it is not enough to know that it has been
sent on time.
You must ensure that there is
adequate provision for the notice to be received in time at the
other end. If the contract specifies a period for
"deemed" receipt, you must serve the notice in time for
that period to pass.
Crucially, if there is no provision
for deemed receipt, service will become a question of fact and you
should take steps to make sure you are covered – either
by hand delivery, or by ensuring that you obtain a fax transmission
receipt or recorded delivery slip confirming service.
Form of Notices
In Ben Cleuch Estates Limited v
Scottish Enterprise, the Court of Session considered whether a
Tenant's break option in a lease had been validly exercised in
a case where the notice had been addressed to the wrong party. If
the court had concluded the notice was invalid the Tenants would
have been bound in for the remainder of the Lease, at a rental cost
in excess of £2,000,000.
The Facts
- 1991 - Scottish Enterprise (then known as the Scottish Development Agency) took a lease of Enterprise House in Dundee from the then Landlords, Faraday Properties Limited
- 1996 - Scottish Enterprise received notification that Faraday Properties Limited had sold Enterprise House to Fiscal Estates Investment Limited, who will be their new landlord
- 2002 - Fiscal Estates Investments Limited sold their interest in Enterprise House.
Scottish Enterprise received formal
intimation from Fiscal Estate's solicitors that the
Landlord's interest had been sold to Pacific Shelf 1145 Ltd.
This was a shelf company which, shortly after completion of the
purchase, changed its name to Ben Cleuch Estates Limited. Scottish
Enterprise received notification of the sale to Pacific Shelf 1145,
but not of the subsequent change of name to Ben Cleuch
Estates.
Ben Cleuch Estates Limited was a
wholly owned subsidiary of Bonnytoun Estates Limited, and shared a
common registered office address, and a common chairman. Bonnytoun
Estates Limited employed managing agents in respect of their whole
portfolio of properties. The managing agents issued the rental
invoices which stated they were "Acting as agents of Bonnytoun
Estates Limited", and referred to the Tenant as "Scottish
Enterprise Whole property Ben Cleuch Estates".
- 2003 - Scottish Enterprise decided to consider exercising their break option rather than continue in the Premises until 2016.
Prior to doing so, they entered into
correspondence with the managing agents to see if the Landlord
would offer any incentive for the break option not being exercised.
The Landlord's proposal was issued by the individual who was
chairman of both companies. However, his e-mails were signed
"Chairman, Bonnytoun Estates" and the e-mail purported to
attach "Bonnytoun's proposals to SE" (which were
written on Bonnytoun Estates headed notepaper). The proposals
included the following statement:
"I write to confirm that
Bonnytoun Estates Limited ("BEL"), through its subsidiary
Ben Cleuch Estates Limited ("BCEL") the Landlord, is
prepared to make the following proposals to your clients Scottish
Enterprise ("SE"). These proposals have been approved by
the board of BEL.
SE hold the property from BCEL on a
full repairing and insuring lease."
- 2004 - SCottish Enterprise decided to exercise their break option and served notice to that effect. The notice was addressed to Bonnytoun Estates Limited at their registered office (For the Attnetion Of: the Chairman) and was copied to their managing agents.
The Implications
If the notice was validly served,
Scottish Enterprise were free to vacate the premises with no
further liability. If the notice was invalid, Scottish Enterprise
would be tied in to the lease for a further ten years at a total
cost of over £2,000,000.
The chairman (who is chairman of both
companies) received the notice at the registered office (which is
the registered office of both companies). However, he was advised
that the notice was invalid since it was addressed to the wrong
company, and so the Landlord sought to tie Scottish Enterprise in
to the lease.
The notice provisions in the lease
provided that any notice to the Landlord should be left personally
or sent recorded delivery to the company's registered office.
Scottish Enterprise argued that since the notice was received at
the correct address, and was ultimately received by the chairman of
the company, then the notice was correctly addressed to the
Landlord (notwithstanding the inclusion of the reference to
Bonnytoun, rather than Ben Cleuch Estates).
When the case first appeared before
the courts, this argument was rejected: for the notice to be valid,
it must be addressed to the correct parties, regardless of whether
the correct recipient is already aware of the content of the
notice.
On appeal, Scottish Enterprise were
successful on the basis that the Chairman was personally barred
from denying Bonnytoun were the Landlords. On the basis of the
numerous items of correspondence sent on behalf of the Landlords,
they had made out that Bonnytoun were to be regarded as the correct
Landlords. However, it is crucial to note that the courts did not
rule the notice was valid – merely that the Landlords
were personally barred from objecting to the notice's
invalidity.
Form of Notices - What you need
to know:
In the correspondence prior to
service of the notice, the chairman of Bonnytoun and Ben Cleuch
Estates did not comment on the fact that the wrong Landlord was
mentioned in the correspondence. He mentioned in court that he
presumed anyone serving a notice "would have to go back to the
source documents".
This is crucial to the service of any
notice, and the original documentation should always be verified
together with any amendments. In this case, the notification of
change of Landlord should have been checked – a routine
search at Companies House for Pacific Shelf 1145 would have
disclosed the change of name to Ben Cleuch Estates and would have
provided the correct details for service of the notice.
To ensure a notice is validly
served:
- Always check the original source documentation for the parties' details
- Make sure that any amendments are kept with the source documentation
- In the case of a company, ensure that the company's registered number is included within the documentation. Unlike the company's name, the registered number cannot be changed and can help to identify the correct parties in later years.
As can be seen from the Scottish
Enterprise case, serving a notice is not simply a case of posting a
letter and assuming it reaches the intended recipient. If the
correct procedures are not followed, it can turn into a vew
expensive exercise indeed. If there is any doubt, you should
contact your professional advisers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
