UK: Break Notice Content: Comply Or Die?

Following hot on the heels from the High Court decision in Marks and Spencer Plc v (1) BNP Paribas Securities Services Trust Company (Jersey) Limited and (2) BNP Paribas Securities Services Trust Company Limited [2013] EWHC 1279 (Ch) comes another key decision affecting the exercise of break options.

Introduction

In Siemens Hearing Instruments Limited v Friends Life Limited (12 July 2013), the High Court was called on to decide an issue on the construction of break notices. Its analysis represents a shift from the strict acceptance of all requirements specified in the lease as to what should be included within a break notice and demonstrates that the parties should always consider the contents of a break option with the utmost care before either serving the notice or choosing to challenge its validity.

In this regard, any exposition of this subject has to be started with the seminal decision in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] A.C. 749 ("Mannai").

Following Mannai, it was established that the construction of break notices had to be approached objectively, and the question was how a reasonable recipient would have understood them. This general statement of the objective assessment of the construction of break notices then had also to be read against the stipulated requirements of the break option; as Lord Hoffman said 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".

Mannai has of course been wheeled out time and again whether by practitioners seeking to maintain (or challenge) the validity of notices or by the Court in its assessment of the construction of such notices. The case under review was no different and the results were significant.

Siemens Hearing Instruments Limited v Friends Life Limited

The Facts

In the instant case, Siemens Hearing Instruments Limited ("SHIL") occupied premises in Crawley, West Sussex pursuant to a lease ("the Lease") dated 27 January 1999 made between (1) Sun Life Assurance Society Plc (later Friends Life Assurance Society Limited ("FLL") and (2) SHIL (which was then known as A&M Hearing Ltd).

The Lease was granted for a term of 25 years from and including 24 August 1998 at an initial rent of £224,000 per annum (which, by the date of the Judgment had been increased to £325,000 per annum) and included a tenant-only break option at clause 19.

By virtue of that clause 19, the break date was specified to be 23 August 2013 and the material part of clause 19 was clause 19.2 which stated as follows:

"Subject to the pre-conditions in clause 19.3 being satisfied on the Termination Date, and subject to clause 19.4 the Tenant may determine the Term on the Termination Date [i.e. 23 August 2013] by giving the Landlord not more than 12 month's [sic] and not less than six month's [sic] written notice, which notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954. The term will then determine on the Termination Date, but without prejudice to any rights of either party against the other for any antecedent breach of its obligations under this Lease".

On or about 28 September 2012 (i.e. within the notice period provided for by clause 19), SHIL's solicitors served a break notice that purported to terminate the Lease on 23 August 2013 in accordance with clause 19 of the Lease.

The validity of the break notice was, however, challenged by, or on behalf of, FLL on the grounds that, contrary to the express wording of clause 19.2, the break notice failed to state that it was given under section 24(2) of the Landlord and Tenant Act 1954 ("the 1954 Act").

By way of recap, the material provisions of section 24 of the 1954 Act state:

Therefore, taking all of this into account, when deciding the case under review, Mr N Strauss Q.C (sitting as a deputy judge of the Chancery Division) directed himself that what he had to decide was whether the break notice as served was a valid notice, taking effect (subject to the due fulfilment of the pre-conditions) so as to terminate the lease on 23 August 2013 notwithstanding that it was not expressed to be given under section 24(2) of the 1954 Act.

The Initial Problem

Before considering the respective parties' positions the Court first had to consider an issue relating to section 26(2) of the 1954 Act that, at the time of the grant of the Lease was unresolved. It was common ground between the parties that both the 1954 Act and this issue formed the essential background to the construction of clause 19 of the Lease.

The key issue referred to (referred to as the Garston point in the Judgment) was the issue as to whether, by virtue of the proviso to section 26(2) of the 1954 Act, a tenant could simultaneously exercise a break clause (which would be within the extended definition of "notice to quit" in section 69 of the 1954 Act) and request a new tenancy under section 26; if so, this might be a beneficial exercise for the tenant to undertake in a falling market.

Lord Justice Lewison (or Kim Lewison Q.C. as he then was) discussed this issue in his 1995 Blundell Memorial Lecture and doubted whether this scenario was possible. He later argued the point successfully in the case of Garston v Scottish Widows Fund [1996] 1 WLR 834.

It was therefore decided in Garston that it was not possible for a tenant to exercise a break clause and then seek to avail of the protection of the 1954 Act and seek a renewal tenancy.

However, this decision was appealed and, at the time of the grant of the agreement for lease that led ultimately to the grant of the Lease in the instant case, the decision of the Court of Appeal had not been determined; the position was accordingly uncertain.

The Court of Appeal did however support the decision made by Rattee J in Garston and added obiter comments that:

"One of the main purposes of Part II of the Act of 1954 is to enable business tenants, where there is no good reason for the eviction, to continue in occupation after the expiration of their contractual tenancies. It is not a purpose of the Act to enable a business tenant who has chosen to determine his contractual tenancy to continue in occupation on terms different from those of that tenancy".

It was common ground between the parties in the instant case that the requirement to state in the break notice under the Lease that it was served pursuant to section 24(2) was inserted so as to avoid, or attempt to avoid, the then perceived risk that otherwise the tenant could do precisely what it was held in Garston he could not do (i.e. determine the tenancy and simultaneously request a new tenancy under the 1954 Act in expectation of improved terms).

SHIL's Position

SHIL sought to maintain that the notice was valid and, in doing so, acknowledged that the conditions for the exercise of an option usually required strict compliance but that this was not an absolute rule and, in the context of this case, it was not about the option conditions but was only about the notice itself. SHIL also maintained its position on the following principal grounds:

1. There was no such thing as a notice under section 24(2) of the 1954 Act; therefore the required formula was meaningless. Section 24(2) made no provision for notices, unlike (for example) section 25 and all that section 24(2) did was to identify a method of determining a tenancy which was not affected by the 1954 Act. Accordingly, since the purpose of section 24(2) was to ensure that a tenant did not give a notice under section 26, which by virtue of section 26(3) would have to be in the prescribed form, all that was required on the proper construction of clause 19 was a straightforward notice such as the one given (and one which did not claim a tenancy under the 1954 Act);
2. Even if clause 19 did require the stipulated words to be stated, on its proper construction the failure to state meaningless words did not render the notice invalid. Further, it must be implicit that this would not be necessary if there was no question of a new tenancy. Bearing in mind the outcome of Garston, it was clear that section 26(2) did not enable a tenant to exercise a break option and also claim a new tenancy. SHIL contended therefore that the parties to the Lease cannot have intended the operative words to have been required in a break notice if there was no longer any point to them;
3. Alternatively, as clause 19 of the Lease did not state what the consequence of not stating that the notice was served under section 24(2) of the 1954 Act was, it was a separate question of construction as to whether the provision was mandatory (so that a non-compliant notice was invalid) or only directory. In this regard SHIL, taking into account the authorities on statutory interpretation, concluded that the section 24(2) requirement was meaningless and noncompliance with it would have no effect of any kind. Therefore, on the proper construction of clause 19, a failure to express the notice as being given under section 24(2) would not render it invalid;
4. In any event, the stipulation was rendered void by section 38 of the 1954 Act (being the provision within the 1954 Act that places a restriction on agreements excluding the lease renewal provisions set out in Part II of the 1954 Act). SHIL referred to the decision in Joseph v Joseph [1967] 1 Ch. 79 in which it was decided that section 38 applied to any provision which had the effect of preventing such a right. Accordingly, SHIL submitted, that, if the law was not as was stated by Garston, in as much as clause 19 required the break notice to state that it was given under section 24(2) of the 1954 Act, it was void as it prevented the tenant from exercising his right to serve a break notice and simultaneously request a new tenancy; and
5. FLL's contended construction was an improbable explanation of the purpose of the required wording as the draftsman would have been wrong to treat section 24 of the 1954 Act as authorising the giving of a notice and wrong to think that such a formula could be an effective means of avoiding the effect of section 26(2) of that act. Further, it would make no commercial sense to deprive the tenant out of possession of a break right when that it is precisely when it would be likely to want it.

FLL's Position

On the other hand, FLL sought to maintain that the failure by SHIL to state that the break notice was made pursuant to section 24(2) of the 1954 Act rendered the break notice invalid. FLL did so on the following principal bases:

1. FLL's primary position was that the service of a common law notice was the opposite of what the parties intended. In this regard FLL maintained that what the parties wanted to achieve by the inclusion of the wording in dispute was to prevent the possible operation of section 26(2), however if SHIL's position was correct then that would mean that all that was required was a common law notice which is exactly what would trigger the possible right under section 26(2);
2. The wording of clause 19 was common and the explanation for it was to be found in the words "apart from this Act" in the proviso to section 26(2). Further, it was not possible for the proviso to section 26(2) to apply if any notice had to be given under section 24(2) of the 1954 Act (i.e. not a common law notice and so not "apart from the Act"). A further consequence of this construction was that a tenant out of occupation could not exercise the break clause as he would have no right to do so under the 1954 Act;
3. The wording as to section 24(2) of the 1954 Act was part of the process of exercising an option and was therefore to be construed strictly; the consequence of non-compliance was that the option was not exercised as the tenant would not have done what was necessary to exercise it;
4. The required wording was not meaningless or pointless; its purpose was to give the landlord arguable means to defeat the proviso to section 26(2) and, whether or not it would have been effective to achieve it, that remained its purpose; and
5. Section 38 of the 1954 Act did not arise unless the decision in Garston was wrong, which it was not. Further, and in any event, section 38 was not engaged by a provision which gave the tenant a limited break right which did not qualify him to request a new tenancy under the 1954 Act.

The Judgment

Taking into account all of the above, Mr N Strauss Q.C. determined that the break notice was in fact a valid notice and had the effect of terminating the Lease on 23 August 2013 subject to fulfilment of the specified pre-conditions.

In reaching this decision, he considered four key factors: (i) mistake; (ii) the meaning of clause 19; (iii) the consequence of non-compliance; and (iv) whether the provision for the required wording was void.

Mistake

In Mr Strauss' Judgement, it was clear that the wording used was not inserted into clause 19 by mistake but was used deliberately.

Further, Mr Strauss considered that the failure to use the required wording in the break notice could not be saved by the decision in Mannai. In this regard, Mr Strauss stated at paragraph 16 of his Judgment that "It is also clear ... that the mistake in the notice, that is the omission of the magic words, is not the kind of mistake which can be corrected in accordance with the decision of the House of Lords in [Mannai]. This is not a case in which it is obvious on the face of the notice that the person drafting it had made a mistake".

The meaning of clause 19

Mr Strauss further determined that there was no doubt about the meaning of the operative words or that, even if they were meaningless (i.e. because there is no such thing as a notice under section 24(2) of the 1954 Act), that is still what clause 19 required.

Mr Strauss also considered that, irrespective of any argument as to the relevance or otherwise of the operative wording, a formula could be created that would enable a compliant notice to be drafted and served. The operative words could not therefore simply be disregarded.

Accordingly, even though he could see that there could become a situation in due course where the wording was rendered pointless so that it did not need to be included within the notice, this situation had not yet arisen and, therefore, Mr Strauss decided that the break notice did not comply with clause 19.

The consequence of non-compliance

It was this area that was subject to the most debate before the Court and the distinction between the parties was that FLL argued that the requirement to include the operative wording was mandatory such that a failure to do so automatically rendered the break notice invalid whilst SHIL contended that the requirement was simply directory and did not therefore have that effect.

In reaching his decision, Mr Strauss reviewed a significant body of previous case law and concluded that, in his view, the position relating to non-compliant notices is as follows:

1. The principles apply equally to statutory and contractual notices;
2. Where the statute or the contract term provides that a non-compliant notice will be invalid or ineffective then that will be the end of the matter;
3. Where it does not, the Court must assess the statutory or contractual intention by the usual objective criteria, including the background and purpose of the provision, and the effect if any of non-compliance;
4. Where the notice is provided for by a statute or a professionally drafted contract, and the draftsman has not provided, either way, for the consequences of noncompliance, it is reasonably to be assumed that this is deliberate, and that it has been left to the Court to decide. Although Mr Strauss stopped short from describing this as a presumption, he did state that it was natural to conclude that it was intended that the notice should, at least in some circumstances, but not necessarily all, survive non-compliance;
5. The use of words such as "must" and "shall" etc is not decisive. The Court will look at the substance, not the form;
6. What is often decisive in practice is the effect of non-compliance. Was the omitted information material which it was essential for the other party to have? Has the non-compliance prejudiced the other party? Mr Strauss stated that notice provisions may be what he calls hybrids, sometimes "mandatory", sometimes not, depending on the nature and extent of the error, and its effect; and
7. Although provisions relating to the exercise of an option are usually mandatory, any such rule is the Court's servant, not its master (borrowing the formulation of Lord Neuberger in Cusack v London Borough of Harrow [2013] 1 W.L.R. 2022), and is not inflexible. Whilst non-fulfilment in respect of the conditions for the exercise of an option will be fatal, the same may not be true as to the form of an advance notice of the exercise of the option.

Applying these principles to the instant case, Mr Strauss concluded that, although the form of the break notice did not comply with clause 19 of the Lease, it was not invalidated by that non-compliance for the following reasons:

1. Clause 19 is part of a well drafted lease and it does not provide that failure to comply strictly with the obligation to include the operative wording would invalidate the attempt to exercise the option. By contrast, clause 19.6 of the Lease made it clear that time is of the essence for the whole clause, including the service of the notice, and the terms of clause 19.2 and 19.3 of the Lease make it clear that the lease will not terminate without fulfilment of the preconditions for the exercise of the option. The only element that does not have a specified consequence is the form of the notice.
2. The failure to use the operative wording made no difference at all. All that mattered was that there was no simultaneous request for a new tenancy in the form prescribed by section 26(3) of the 1954 Act. Once notice to quit had been served, section 26(4) precluded any later such request. Accordingly, Mr Strauss did not consider that the inclusion of the operative words was an indispensable condition, in fact he concluded that it was not something that gave FLL necessary or even relevant information.
3. It would not be a sensible construction of clause 19 to hold that the use of the required words is mandatory in the circumstances. To do so would be to adhere slavishly to a supposed rule of construction that makes everything about the process of exercising an option mandatory. Further, it is not possible to realistically attribute to the parties an intention to make the tenant's exercise of an important right dependent on compliance with a meaningless formula.

Was the provision for the required wording void?

Although it made no difference to the result, in Mr Strauss' Judgment, the argument advanced by FLL was preferred.

Mr Strauss considered that Garston represented the present law and noted that nobody was suggesting that it was wrongly decided. Accordingly, section 38 has no effect in this situation as the operative words had no effect on SHIL's rights under the 1954 Act.

Further, Mr Strauss agreed with FLL that, even if Garston had been decided differently, section 38 would not have been engaged as the agreement would not have had the effect of destroying SHIL's rights under the 1954 Act but rather it would have limited SHIL's contractual break rights in such a ways as to prevent it from qualifying in a particular way for 1954 Act rights.

Conclusion

This decision is likely to take many by surprise, much as it did the writer.

Having established that it was a requirement of the break option for any notice to include the operative wording and having established that the break notice as served failed to comply with the terms of the break option, one would have thought that the Court would, in turn, conclude that the attempt to exercise the break option had failed.

However, it did not do so and, in deciding that the notice was valid, created a formulation that will cause landlords seeking to frustrate a tenant's attempt to break significant heartache.

There will inevitably be leases that, such as was the case here, seek to create a framework for the form and content of the break notice but that do not clearly specify the consequences for failing to comply with that framework. Based on this decision, there is a significant risk that landlords, faced with this sort of wording, will be unable to use the tenant's failure to comply with the requirements as to form and content of the notice in order to defeat the break.

Also, not all break options state clearly that time is of the essence. What does that mean now? It has long been accepted that time is of the essence for the service of the break notice where the break option specified a time limit in all cases involving the exercise of a break option (following cases such as United Scientific Holdings v Burnley Borough Council [1978] A.C.904). Does this remain the case or will we now see further challenges as a consequence of this decision?

On the other hand, the message from this case to tenants is clear; you should still draft your break notices accurately to maximise your chances of success and to minimise your risk of a successful challenge. However, if you do make mistakes with the form and content of your break notice, it may be possible to avoid being prevented from exercising your break if the break option is not sufficiently clear as to the consequences of non-compliance.

Going forward then, the writer considers it likely that this decision could ultimately be appealed (which would not be unusual bearing in mind the recent history of break cases). Whilst the Court undoubtedly made a decision based on the facts of this lease, the formulation of interpretation of contracts may give rise to a challenge of the merits of this decision. The uncertainty it has created is certainly unwelcome.

Until that day, however, landlords will need to consider very carefully the strength of any challenge as to the form and content of a break notice and tenants may have just a slightly larger margin of error in appropriate cases than they did beforehand.

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.