Fit to break

The law requires strict compliance when exercising options, so the act of serving a break notice and advising on compliance with conditions is fraught with risk. At worst, your client could fail to exercise a one-off break that could render them liable for the remainder of all rents due until contractual expiry. This article sets out some practical guidance on exercising breaks, based on the authors’ experiences.

Who should serve the notice, and on whom?

Unless the lease provides otherwise, a break notice should be served by and on the registered proprietors of the leasehold and reversionary interests, as shown at HM Land Registry (HMLR).

In Brown and Root Technology Ltd v Sun Alliance & London Assurance [2001] Ch 733, a tenant transferred its lease to a group company, but the assignment was not registered at HMLR. The original tenant served a break notice, which the landlord disputed. The Court of Appeal held that the original tenant was still entitled to exercise the clause. Unless otherwise specified, assignment means a legal assignment, and in the case of registered land, there is no legal assignment until the assignee is registered at HMLR.

Similarly, in Standard Life v W&J Linney Ltd [2011] L&TR 9, a notice was invalid because it was served on the original landlord, who had already transferred the reversion.

The change in emphasis from tenants’ efforts to satisfy pre‑conditions to the effect of any breaches may make it difficult to advise what tenants must do to materially comply

In Ben Cleuch v Scottish Enterprise [2008] CSIH 1, the landlord was Ben Cleuch Estates Ltd. However, rent demands served by agents stated that they were acting for another company. The tenant served its break notice on that company. The Court of Session in Scotland held that the notice was invalid because it was not served on the landlord.

If the break is expressed to be personal, it will be lost on assignment, even if the lease is subsequently re-assigned to the original tenant (Aviva Life & Pensions UK Ltd v Linpac Mouldings Ltd [2010] EWCA Civ 395).

If there are joint tenants or more than one landlord (commonly, where the reversion is held by two trustees), the break must be exercised by or on both co-owners in order for it to be effective, unless the lease provides otherwise.

In Prudential Assurance Co Ltd v Exel UK Ltd [2009] EWHC 1350 (Ch), a lease held by co-tenants included a break option exercisable by ‘the Tenant’. Solicitors served a break notice, stating that they were giving notice as agents for one of the co-tenants. The notice was invalid, because a reasonable recipient would not have understood the notice had to have been given on behalf of both co-tenants.

Confirming names and addresses

When serving a break notice in relation to registered land, remember to carry out up-to-date searches at HMLR and check addresses at Companies House, to make sure you serve the notice on all the correct recipients at the correct addresses, and on behalf of all the correct entities. Also, make sure that the notice is also sent to any different address prescribed by the lease.

If the recipient’s interest is not registered, ask for written confirmation of the identity of the correct recipient. It is not safe simply to rely on information from rent demands or other correspondence. If there is any uncertainty, serve the original notice on the person you believe to be the correct recipient, and a second notice on anyone else, without prejudice to the validity of the first notice.

Service by or on an agent

If an agent is serving the notice, it is important that the notice states that the agent is acting on behalf of the principal, and that the scope of the agent’s authority extends to serving the notice.

In Hexstone Holdings Ltd v AHC Westlink Ltd [2010] EWHC 1280 (Ch), a break notice was served by an employee of the tenant, purporting to act for an associated company of the tenant. The court held that it was invalid. The notice would only have been valid if it had stated that the employee and the associated company were agents for the tenant and they could prove authority to act for the tenant. The reasonable recipient would not have known that the agent was authorised to serve the notice.

If a notice is served on an agent, the notice will have been validly served if the agent is duly authorised to accept service of the notice (Galinski v McHugh (1989) 21 HLR 47).

Calculating the break date

If the break date is not expressed numerically, it is important that you calculate the term correctly. If the term is expressed to run ‘from’ a date, then the term excludes that date (Trow v Ind Coope (West Midlands) Ltd [1967] 2 QB 899). If the term is expressed to commence ‘on’ a date, then the term includes that date. This is a presumption which can be rebutted, for example if the rent payment and rent review dates indicate that the parties intended otherwise.

If there is no requirement in the lease for the notice to specify the date upon which it will expire, the notice will be valid if it unambiguously informs the reasonable recipient how and when it is intended to operate. In Allam & Co v Europa Poster Services Ltd [1968] 1 All ER 826, a notice was held to be valid which was expressed to expire ‘at the earliest date after the service of this notice that the lease can lawfully be terminated’.

If in doubt as to the termination date, repeat the wording of the break clause without specifying a date. If the break option requires you to specify a date, consider serving a second notice specifying the alternative date, without prejudice to the validity of the first.

Length of service required

Unless there is express provision to the contrary, time is of the essence for complying with any time stipulations in the break option, irrespective of whether this is stated in the lease (United Scientific v Burnley Council [1978] AC 904).

What do you do if the lease appears to require a fixed period of service? The safest option is to give the exact period of notice required. However, it is generally assumed that giving more notice will not affect the validity of service, depending on the exact wording of the break clause. In Hexstone Holdings , the lease required giving ‘six months’ prior written notice’, and the High Court held that more than six months’ notice could be given (although the point was obiter).

However, some common sense is required. In Biondi v Kirklington & Piccadilly Estates Ltd [1947] 2 All ER 59, the tenant’s option to renew a 35-year term was exercisable ‘on the written request of the lessees made six calendar months before the expiration of the term’. The tenant served its notice to renew almost immediately after term commencement, which was held to be invalid. No long interval of time was contemplated between the making of the request and the granting of the further lease. Similarly, in Multon v Cordell [1986] 1 EGLR 44, three years’ notice invalidated a notice to renew where the option was exercisable ‘on the written request of the tenant made three months before the expiration of the term’. Specifying three months’ notice suggested that the request must be made within a reasonably short time before the end of the lease.

Defects in drafting

Sometimes, a defective break notice may be saved by applying the ‘reasonable recipient’ test set out in Mannai Investment Co Ltd v Eagle Star Life Assurance Co [1997] AC 749 (HL).

In Mannai, the break notice misstated the break date. Instead of ‘13 January’, the tenant inserted ‘11 January’. The House of Lords held that the tenant could rely on the notice, because it was patently obvious what the tenant wished to achieve. The Mannai test of validity is: ‘Does the notice, construed against its contextual setting, unambiguously inform a reasonable recipient how and when the notice is to operate under the right reserved?’ This test is objective – a notice might be invalid even if the actual recipient was not in fact misled.

In Mannai , it was crucial that there was no other alternative date which could have been specified in the notice. In contrast, in Peaceform Ltd v Cussens [2006] 3 EGLR 67, the lease contained a tenant’s right to break on giving three months’ notice. A notice was served on 27 August, specifying a break date of 7 November 2003, which was less than three months. It was not clear which date the tenant had intended to specify in the notice, so the notice was invalid.

Advise your client to instruct surveyors to advise whether repair and decoration covenants in the lease and any licences have been complied with, if relevant.

The Mannai test has also assisted in cases where the error relates to the parties’ names. In Baker Tilly Management Ltd v Computer Associates UK Ltd [2009] EWHC 3911 (Ch), the tenant changed its name but served a break notice using the old name. The judge held that it was valid. The tenant had not undergone a material change, just changed its name. The landlord recipient was taken to know this, and the break notice was not confusing to the reasonable recipient.

The Mannai test will not assist where information which was required to be included in the notice has been misstated. If the lease in Mannai had required the notice to specify the correct break date, the notice would not have been saved. This has come to be known as the ‘blue paper test’ owing to the following quote from Lord Hoffman: ‘If the clause had said that the notice had to be served 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.’

Methods of service

If the lease prescribes a method of service, this method must be used. The Mannai ‘reasonable recipient’ test is not relevant to service.

In Hotgroup plc v RBS [2010] EWHC 1241 (Ch), the break option required service on both the landlord and its property managers. The tenant served the notice on the landlord, but did not serve the property managers until after the last date for the exercise of the break option. As a result, the notice was not validly served. In Capital Land Holdings Ltd v Secretary of State for the Environment [1997] SC 109, the lease provided that notice must be sent to the landlord’s registered office. The tenant sent the notice to the landlord’s place of business instead. Even though the landlord received the notice, service was invalid.

The date of service at common law is the date when the notice is received. Actual receipt is a requirement: merely putting a letter in the post or leaving it at the recipient’s house is insufficient, unless it can be proved that the notice came to the attention of the recipient or its authorised agent (Beanby Estates v Egg Stores (Stamford Hill) Ltd [2003] 1 WLR 2064). If section 196 of the Law of Property Act 1925 applies to the lease, however, service is deemed to take place at a given time, depending on which of the prescribed methods of service has been used.

Pre-conditions

If the break option is subject to pre-conditions, those conditions must be strictly complied with in order to terminate the lease (Legal & General v Expeditors International (UK) Ltd [2007] 2 P&CR 10). The most common pre-conditions are performance of the tenant’s covenants in the lease, payment of rent, and delivering vacant possession. If the conditions are absolute, any shortcoming, however trivial, will prevent the tenant from validly exercising the option.

In Bairstow Eves (Securities) Ltd v Ripley (1993) 65 P&CR 220, the lease contained a tenant’s option to renew, exercisable only if the tenant had complied with all its covenants. The tenant had failed to paint the premises during the last year of the tenancy. The Court of Appeal said that the break had not been validly exercised, even though the premises had been painted in the previous year.

Time for compliance

Consider carefully whether the pre-conditions must be complied with when serving the break notice, or by the break date. This issue often causes consternation where a break premium is payable.

Qualified covenants

Conditions are often qualified by words such as ‘substantial’, ‘material’ or ‘reasonable’. In Fitzroy House Epworth Steet (No 1) Ltd v Financial Times Ltd [2006] EWCA Civ 329, the Court of Appeal confirmed that the test for material compliance is objective and should be assessed not by the conduct of the parties, but by whether any breaches could affect the landlord’s ability to re-let or sell the property without delay, result in additional expenditure, or negatively impact on re-letting terms. Where a pre-condition requires only reasonable compliance, the extent of the tenant’s efforts to comply are more likely to be relevant. The court suggested that ‘substantial’ and ‘material’ are interchangeable.

The change in emphasis from tenants’ efforts to satisfy pre‑conditions to the effect of any breaches may make it difficult to advise what tenants must do to materially comply. However, it may give an angle to argue that if market conditions would prevent the landlord re-letting quickly anyway, the tenant’s breaches would have had no effect.

Payment of rents

Payment of all rents due up to the break date is a common pre-condition. Even this can cause harsh results. In Avocet Industrial Estates v Merol Ltd [2011] EWHC 3422 (Ch), the exercise of the break option was conditional upon payment of all sums due under the lease. The tenant failed to pay £130 of interest due on late payments. Even though the landlord had not demanded the interest, it held a substantial rent deposit, and the amount at stake was small, it was enough to prevent the tenant breaking the lease. In QuirkCo Investments Ltd v Aspray Transport Ltd [2011] EWHC 3060 (Ch), the tenant had a lucky escape. It failed to pay an insurance premium that the landlord had demanded, but it transpired that the landlord had not repaid its broker prior to the break date, meaning that the demand for insurance rent had not been validly made.

There are often arguments about whether the tenant can apportion the rent where the break date falls between rent dates. Following Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, rents payable in advance must be paid in full unless there is an express apportionment clause in the lease. The safest option is to pay the whole quarter’s rent and seek a partial refund after the break has exercised.

Giving vacant possession

A requirement to give ‘vacant possession’ may not be satisfied as a result of items left in the premises; the presence of sub-tenants, contractors or trespassers; or failure to hand back the keys. A delay of even one day in returning the keys may prevent the break exercising. The Court of Appeal clarified in NYK Logistics (UK) Ltd v Ibrend Estates BV [2011] EWCA Civ 683, that, in order to give vacant possession, the following three conditions must be satisfied.

1. The property must be empty of people.
2. The landlord (or buyer) must able to assume and enjoy immediate and exclusive possession, occupation and control of the property.
3. The property must be empty of any chattels that would substantially prevent or interfere with the enjoyment of the right of possession of the property.

In practice, a tenant should always be advised to remove everything and everyone from the premises, in order to avoid an argument about whether vacant possession has been given.

The tenant should also be careful to return the keys by the break date. In several recent cases, retention of keys has been a factor contributing to vacant possession not being given. Retaining the keys may be interpreted as asserting a continuing right to possess the premises and exclude the landlord, even where the landlord has their own set of keys, as was the case in Mourant Property Trust v Fusion Electronic UK Ltd [2009] EWHC 3659 (Ch).

Avoiding breaches of covenant

If acting for a tenant exercising a conditional break option, serious consideration should be given to whether there could be any breaches of covenant that might prevent the break exercising.

Check that all sums have been paid in full, and on time, and ask the landlord to confirm that there are no sums outstanding.

Advise your client to instruct surveyors to advise whether repair and decoration covenants in the lease and any licences have been complied with, if relevant.

Ensure that all chattels and rubbish are removed by the break date and that contractors do not access the property after the break date.

Ensure that the keys are returned promptly, with a receipt provided by the landlord.

Waiver / estoppel

If your client has served a defective notice, or failed to comply with pre‑conditions, it may be possible to argue that the receiving party has waived compliance with the strict requirements of the break clause, or is estopped from challenging the notice.

Waiver requires reliance upon a clear and unequivocal representation that the provision in the break clause will not be enforced.

Similarly, for an estoppel argument to succeed, it must be shown that a factual representation has been made, the person asserting the estoppel relied on that representation, and this reliance has resulted in detriment.

In MW Trustees Ltd v Tellular Corp [2011] EWHC 104 (Ch), the tenant incorrectly served a break notice on the old landlord, who forwarded it to the current landlord. The current landlord’s representative emailed: ‘We accept the attached letter and can confirm that we are happy for you to break the lease.’ This went beyond acknowledgement of receipt and constituted a waiver of the defect in the notice.

Silence on the part of the recipient is not usually enough to support an estoppel defence. The court confirmed in Lemmerbell Ltd v Britannia LAS Direct Ltd [1998] EWCA Civ 1506 that there is no positive duty on landlords to flag up problems with break notices received. However, where a landlord states that no objection is made to a notice, it will not be entitled to go back on that representation (Dun & Bradstreet Ltd v Provident Mutual Life Assurance Association [1998] 2 EGLR 175).

If you are acting for the recipient of a break notice which appears to contain errors, ensure that your client does not accept the notice in subsequent correspondence, or by conduct of behaviour which illustrates that the break is accepted. The safest option is to write back challenging the validity of the notice. It is also advisable to respond to any valid notice stating that your client requires full compliance with any pre-conditions, to avoid any argument that these have been waived.

General practice points

Careful attention needs to be paid to what to specify in the break notice, where, when and how to send it, and how and when to comply with any pre-conditions. Get a colleague to check the notice to avoid any little mistakes that could give rise to arguments over the validity of the notice.

It is especially important, when acting for tenants, to consider how break machinery will operate at the drafting stage. Avoid agreeing onerous conditions such as material compliance, and ensure that the break date, service provisions and deadlines for compliance with conditions are clear. Incorporate an ability to apportion the rent if the break date is not the last day of a rental period.