Breaking bad

The serving of a bad or defective notice has produced a wealth of litigation over the years. The fact that no-one has been misled, confused or in any way disadvantaged has never deterred those who want to take the point, particularly where the stakes are high. And, they are usually not higher where commercial leases are concerned and the tenant wants to break the lease. Where there may be grotesquely disproportionate and serious consequences for the party (or its adviser) who gets it wrong, a range of different responses has evolved in order for the courts to produce a more just outcome. The defences have been characterised as falling into four categories (see 152 NLJ 424 Gaunt):

1. The Mannai defence – the intended effect would have been perfectly clear to any reasonable recipient.
2. The covering letter defence – the defect is corrected elsewhere in the notice or by a covering letter.
3. The like effect defence – the notice is “substantially to the like effect” as the prescribed form.
4. The mere inaccuracy defence – the defect is a mere inaccuracy in the required particulars which does not invalidate the notice.

The more alert and eagle-eyed of our property newsletter subscribers will have spotted that break clauses figured as recently as in the July edition of the newsletter with consideration of Marks & Spencer v BNP Paribas [2013] EWHC 1279 (Ch)  which concerned a rental payment spanning the period after termination of the lease. Break clauses of course remain of enduring interest to all practitioners whether advising landlords or tenants. The volume of cases going through the courts demonstrates vividly landlords’ predilection to take all steps – i.e. take every technical point – to avoid losing a tenant and having a rent void instead. So no apologies for revisiting the topic again so soon, prompted by another Chancery Division decision in Siemens Hearing Instruments Ltd v Friends Life Ltd [2013] WL 3450842 EWHC. 

The facts in Siemens were straightforward and unremarkable. The break clause – clause 19 of a 1999 lease – required, as is conventional, the satisfaction of several pre-conditions: vacant possession, the rent being up-to-date and payment of a premium of half the annual rent.

It required notice to be given within the period of six to twelve months before the termination date and time was made of the essence. Critically, it also required notice to be given in a particular form:  "… which notice must be expressed to be given under Section 24 (2) Landlord and Tenant Act 1954).”

The notice was served comfortably within time by the tenant’s solicitors.  It stated that the tenant intended to terminate the lease: "In accordance with clause 19 of the lease …" but it failed to say that the notice was expressed to be given under section 24(2) Landlord and Tenant Act 1954. All it would have needed to have included to have avoided the litigation and been a good notice was “under section 24(2)…"

Now section 24(2) does not make any provisions at all about notices. So it is no surprise that it was submitted on behalf of the tenant that the words were meaningless. That submission was rejected. Just because they did not achieve anything of value did not mean that they could be ignored. Cue Lord Hoffmann and his now often quoted example which he gave in Mannai:  "If the clause had said that the notice had to be on blue paper, it would be no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease". The words therefore could not simply be disregarded and the court was driven to the inevitable conclusion that the notice given did not comply with clause 19.

How then did the judge manage to uphold the tenant’s claim to have exercised the break clause after that? Skillfully and pragmatically, N. Strauss QC, sitting as a Deputy Judge of the Chancery Division, focused on the consequences of non-compliance. He discussed the traditional dichotomy between provisions that can be said to be mandatory or directory. The use of the word “must” was held not to be decisive. He was also able to take heart from a recent decision of the Court of Appeal in Newbold v The Coal Board [2013] EWCA Civ 584 in which Sir Stanley Burnton concluded that non-compliance with a requirement may not be fatal. It is necessary to consider the words of the particular statute or contract in the light of its subject matter, the background, the purpose of the requirement and the actual or possible effect of non-compliance on the parties.

It is the last factor, which must be thought to have played a big part. The absence of words which, if not meaningless, did no more than put up a compliance hurdle to no effect provided the landlord with the platform for the most technical of objections, but one devoid of any substantive merit. He was also happy to adopt the flexible approach of Lord Steyn in R v Soneji [2006] 1 A.C. 340 in focusing intensely on the consequences of non-compliance.

The judge concluded that from the authorities the position relating to non-compliant notices is as follows:

1. The principles apply equally to statutory and contractual notices.
2. Where the contract term provides that a non-compliant notice will be invalid or ineffective, that is the end of the matter.
3. Where it doesn't, the court must assess the usual objective criteria, the background, the purpose of the provision and the effect of any non-compliance.
4. Where it hasn't provided for the consequence of non-compliance, one may reasonably assume this is deliberate.
5. The use of “must” or “shall” is not decisive.
6. What is often decisive in practice is the effect of non-compliance.

The judge found, applying those principles, that the failure to use the required wording made no difference at all and concluded finally that he did not think "incantation of the magic words was an indispensable condition; it was not something which gave the defendant necessary or even relevant information.” So the notice was effective, and the lease was terminated.

Siemens follows hard on the heels of Marks & Spencer in rejecting the landlords’ case but it may be too early to identify a trend that in break clause cases tenants are now being favoured not least because the latter is due to be heard in the Court of Appeal in March 2014. Keep watching.