Property Litigation – break clauses

Background

A number of high profile cases relating to tenants seeking to exercise break clauses in leases have hit the headlines in recent months. Although retailers have seen an improvement in trading conditions over the summer period many retailers are continuing to consolidate their property portfolios.

Exercising break clauses in leases where the opportunity arises is one method of reducing a leasehold property portfolio. Whether it is the landlord or the tenant seeking to bring the lease to an end, it is usual for the exercise of the break clause to be conditional upon notice having been served in the correct manner. In addition, tenant break clauses often require compliance with various conditions on or before a particular date such as on the break date itself.

The facts

It was the content of the break notice which was the subject of the dispute in the case of Siemens Hearing Instruments Ltd v Friends Life Ltd. The High Court was asked to determine the validity of the break notice which the tenant, Siemens, had served and which on the face of it did not contain the information required by the break clause.

The parties had entered into an agreement for lease in 1997 relating to premises in Crawley. The parties then subsequently entered into a 25 year lease in 1999. Siemens could only seek to break the lease on one date being 23 August 2013. The rent had increased by over £100,000 to £325,000 with Siemens also liable to pay rates and insurance premiums and accordingly Siemens served notice on Friends Life to break the lease on the break date.

• In order to validly break the lease, on or before the break date Siemens had to:
• Deliver to the landlord vacant possession;
• Pay all rent and other sums due up to 23 August 2013; and
• Pay a break premium in the sum of one half of the annual rent.

However, the break clause also required the break notice to expressly state that it was given under section 24(2) of the Landlord and Tenant Act 1954. At the time the lease was entered into it was unclear whether a business tenant could break its lease and simultaneously request a new lease under section 26 of the Landlord and Tenant Act in order to take advantage of falling market rents. By inserting this additional requirement into the break clause the landlord was seeking to prevent Siemens from taking advantage of potential lower rents in the future.

The break notice served by Siemens made no reference to section 24(2) of the Landlord and Tenant Act 1954 and accordingly, after the break date, Friends Life communicated its intention to treat the lease as continuing. The case went to trial.

Friends Life argued that Siemens attempt to break the lease had been invalid on the basis that all conditions attached to the exercise of a break clause had to be strictly complied with. Siemens on the other hand, amongst other points, argued that the requirement to refer to section 24(2) in the break notice was meaningless (as a result of case law decided after the date the parties entered the lease) and that even if the break clause did require the notice to refer to section 24(2) the failure to include the reference did not mean that the notice was invalid.

The High Court agreed with Friends Life that the break notice did not comply with the provisions of the break clause. This could have been a significant blow to Siemens given that the lease was set to run for a further 10 years if it had not validly exercised the break clause.

The High Court however went on to decide the case in favour of Siemens on the basis that:

i) The lease did not say that the failure to refer to section 24(2) would be fatal to the exercise of the break clause

ii) Friends Life was not prejudiced by the failure to refer to section 24(2)

i) it did not make sense for the break clause to be interpreted in such a way to require compliance

ii) it was unlikely that at the date of grant of the lease the parties intended that non-compliance with a ‘meaningless formula’ would invalidate the attempt to break the lease

Given the courts previous strict approach to whether or not condition conditions attached to break clauses have been complied with, this decision will have been welcomed by Siemens.

A shift in judicial sympathy?

Although the decision in this case could reflect a change of approach to the question of compliance, landlords and tenants who are exercising conditional breaks would be ill advised to rest on their laurels when it comes to the preparation and service of a break notice and complying with conditional breaks. It is yet to be seen how widely this decision will apply and in the meantime reliance upon the interpretation of the language used in a break clause could be a costly mistake.

For further information on the issues raised in this article, please contact Katherine at katherine.breckin@michelmores.com