Clean break

Lawyers may be forgiven for believing that issuing a break notice to terminate a lease is easier to get wrong than right. A seemingly endless stream of challenges come before the court. The dictates are, of course, economic: the state of the commercial property market is such that rarely will a landlord want to pass up any opportunity of treating a notice as invalid, and breaking leases created five or more years ago has rarely been more of an attractive proposition to tenants. So what should you do and what should you avoid?

The basics seem simple enough (see box below) but the traps are ever present.

Getting the landlord wrong

This is surprisingly easy, since the temptation is simply to look at the front of the lease. The freehold reversion (or superior leasehold interest) may well have been assigned, as so much commercial property is treated only as a financial asset. In MW Trustees Ltd v Telular Corporation [2011] EWHC 104 (Ch), the tenant served the original landlord, not the current landlord. The tenant was then directed by the original landlord to the managing agent for the new landlord, who expressly accepted the (wrongly addressed) letter forwarded by email.

Mr Justice Peter Smith held that the 'reasonable recipient' test would have disposed of the misnaming of the landlord in this context had it been necessary (applying Mannai Investments Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 HL), but the agent's express acceptance either estopped a challenge to validity when the tenant relied upon what the agent had done, or waived the formal requirements for the notice to be valid under the lease (the not untypical stipulations for notice to be in writing and served by special delivery or by hand at the landlord's registered address). The tenant had accordingly succeeded in operating the break clause.

The case is interesting in two ways: first, it shows that it is important when receiving a notice to acknowledge receipt without expressing acceptance of its validity; and, second, because a careful reading of the relevant provision showed that the notice had to be sent to the current landlord, but it did not require the current landlord to be referred to within it: a case of not needing to read too much into the text.

Getting the tenant wrong

It seems that this is an even easier mistake to make than getting the landlord wrong. Commercial tenants can occasionally forget who they are; in Hexstone Holdings Ltd v AHC Westlink Ltd [2010] EWHC 1280 (Ch) the tenant announced a merger and name change, without actually carrying them out. As a result, it managed to serve a notice in the name of its parent company, with consequences fatal to its validity.

This case belongs in a long line of similar errors, including failing to give notice in the name of both joint tenants (Prudential Assurance Co Ltd v Exel UK Ltd [2009] EWHC 1350 Ch); naming the original tenant after assignment (Proctor & Gamble Technical Centre Ltd v Brixton Estates Ltd [2003] EWHC 2835 Ch); naming an associated company which was in actual occupation, rather than the tenant (Lemmerbell Ltd v Britannia LAS Direct [1998] 3 EGLR 67); and a tenant giving notice in the name of its subsidiary (Havant International Holdings Ltd v Lionsgate (H) Investment Ltd [1999] EGCS 144).

Havant is a rare case where the application of the reasonable recipient test saved the notice. Perhaps attitudes have hardened since 1999. Getting the name of the tenant wrong is usually fatal because the error may not be obvious to the recipient; it may be that there has been an unapproved assignment or one company is acting, without authority, for another.

Missing out a requirement

The parties might be correctly identified, but is that enough? Much commercial property is managed on behalf of institutional landlords or private individuals. The managing agent was in fact served in MW Trustees Ltd unnecessarily, but the reverse occurred in Hotgroup Plc v Royal Bank of Scotland Plc [2010] EWHC 1241 (Ch). There the lease required service of the break notice, not only on the landlord, but also on its managing agent. The omission to serve the latter was fatal.

The Hotgroup case is interesting in another feature. As noted in the box above, break notices will be construed strictly and against the party serving it (contra proferentem). The break clause itself will usually be present in the lease at the insistence of the benefiting tenant, and so construed against the tenant (Hill and Redman's Law of Landlord and Tenant). In Hotgroup the unusual part of the lease dealing with notice being required to be given to the managing agent was to the landlord's benefit and so capable of strict construction against it. Sadly for the tenant, it was unambiguous and so there was no avoiding its effect.

Does the right still exist?

Resistance to the inclusion of a break clause may lead to it being granted personally only to the original tenant. In cases of modern corporate structures, where assets and liabilities may be switched between group companies, this can be overlooked. Such personal rights will be lost at first assignment (Norwich Union Life and Pensions v Linpac Mouldings Ltd [2010] EWCA Civ 395), even if subsequently assigned back to that original tenant (Norwich Union Life and Pensions v Linpac Mouldings Ltd [2009] EWHC 1602 Ch). At a time when the hot issue at assignment within a group of companies is the value of any parent guarantee, this is a point not to be missed.

If in doubt?

Time is of the essence in matters of break notices, so, if there is doubt over validity, the tenant should serve further notices (without prejudice to the validity of the former). It may also be possible to obtain agreement as to validity, so as to operate as a waiver or an estoppel (MW Trustees Ltd). The landlord, by contrast, is best advised to sit tight until the deadline for a valid notice expires, at which point the blue touch-paper can be lit.