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Tenant finds break option invalidated by failure to specify exact words required in break.

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First appeared in Informer: Real Estate Newsletter - Spring/Summer 2014

A number of the High Court's decisions in 2013 appeared to herald the Court taking a less strict approach to the interpretation of lease provisions (albeit the merits of the decisions were treated with a degree of scepticism by property litigators). Two of the cases in question were appealed and the Court of Appeal has now overturned the first instance decisions. Owen Talfan Davies, a Partner in the Property Litigation Group, provides a synopsis of each of the cases below.

Friends Life Ltd v Siemens Hearing Instruments Ltd [2014] EWCA Civ 382

The Court of Appeal's decision in Friends Life –v- Siemens Hearing Instruments provides a stark reminder of the potential pitfalls when exercising a break right. The Court of Appeal, overturning the High Court's first instance decision, held that Siemens' tenant break notice was invalid as specified wording, which the lease's break clause stated "must be expressed" in the notice, was omitted.

The Court of Appeal reached its decision irrespective of the fact that the break notice clearly intended to terminate the lease in accordance with the break clause and the wording that had to "be expressed" in the notice was of no legal effect.

The reasoning? It all goes back to the nature of options (of which break clauses are a type). An option is an 'if' contract. If you do it, it can be exercised. If you don't, it won't. 

Under the terms of its lease, Siemens could break if (amongst other things) it specifically stated in the break notice that notice was "given under section 24(2) of the Landlord and Tenant Act 1954". Those serving the notice failed to include these words (presumably assessing them to be of no legal effect).

For observers, the case re-emphasises the considerable care that must be taken when drafting break notices and highlights the limited extent to which a party can rely upon the Mannai test to remedy defects in a notice (especially where strict compliance is a prerequisite) … subject, of course, to whether the Supreme Court has a say on this case.

Marks & Spencer plc (M&S) v. BNP Paribas Securities Services Trust Company (Jersey) Limited [2014] EWCA Civ 603

The Court has addressed the perils of conditional break clauses on many occasions. As a result of Court's strict approach, practitioners will invariably advise tenants exercising a break option to ensure they pay a full quarter’s rent due on a rent payment day, even if the rent payment day is the break date or the break date falls during the subsequent rent payment period. The reasons for this are twofold. Firstly, rent payable in advance is neither apportionable at common law nor under the Apportionment Act 1870. Secondly, if the break is subject to conditions that have yet to be satisfied, the parties cannot be certain whether the lease will continue or terminate on the break date - the tenant should continue to comply with its obligations under the lease until the break takes effect.

As a consequence of the above, the Court has had to consider tenants' claims for the repayment of rents and other sums paid in respect of the period after leases have expired. The Court's approach to such claims had been robust and landlord friendly until, in something of a legal turnaround, Marks & Spencer plc v BNP Paribas Security Services Trust Co (Jersey) Ltd, where the High Court allowed the tenant, M&S, to reclaim £1.1m of rent paid in advance for the period after a break date, concluding that a repayment provision should be implied into M&S' lease.  

Tenants had hoped that the case would prove to be a turning point in the battle for apportionments following lease expiry … property practitioners were sceptical. Unsurprisingly, the Court of Appeal did not agree with the High Court and overturned the decision, concluding that, if the parties intended rent to be apportioned following the break, they could easily have expressly provided for this. The Court of Appeal held that the test for an implied term was not met in the M&S case.

The Court of Appeal's decision does provide a greater degree of clarity and certainty (although in certain circumstances the door will remain open for tenants to argue for an implied repayment provision should the test for an implied term be capable of being met).

It follows that if parties genuinely intend rent to be apportioned following a break, they should expressly provide for this as only an express provision will provide the certainty which the Court struggled to achieve in this case.

Owen Talfan Davies, Partner, Property Litigation Group

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