Break options: landlords and tenants take note! 

United Kingdom

Two decisions handed down in May 2018 have highlighted how contentious a dispute about notices can become between a landlord and tenant.

Strict compliance with notice clause formalities

Ropemaker Properties v Bella Italia

In the first case, Ropemaker Properties Limited v (1) Bella Italia Restaurants and (2) Casual Dining Group Limited[2018] EWHC 1002 (Ch), a notice served by the tenant was held to be invalid because it did not comply with a formal requirement in the agreement for lease for the tenant also to serve it on the tenant’s guarantor.

The decision is a reminder that a failure to comply strictly with formal notice requirements set out in the lease can be fatal to the validity of a notice. It will not be good enough to say that a reasonable party would have understood the intention, notwithstanding a technical defect. Particularly in this case, where it might have been said that it was perverse to require a tenant to formally serve its own guarantor with a copy of a notice destined for the landlord’s attention – the tenant and guarantor had specifically resolved to serve the notice, and the guarantor had been sent a copy of the notice “for [its] records”. Notwithstanding these facts, the court held that the tenant’s notice was invalid, because it had not been served on the guarantor.

The decision

In his judgment, Mr Justice Fancourt went so far as to acknowledge that the result might be considered “technical and unattractive” but, applying Siemens Heating Instruments Ltd v friends Life Limited [2014] EWCA Civ 382, a failure to comply with such formalities will invalidate the notice and “it makes no difference that the requirements were substantially complied with or had no apparent purpose or benefit”.

Pre-conditions to break: did delivery of vacant possession mean reinstatement too?

Goldman Sachs v Procession House

In the second case, Goldman Sachs International v (1) Procession House Trustee Ltd and (2) Procession House Trustee 2 Limited (unreported), the court considered the proper interpretation of the pre-conditions the tenant must comply with in order to successfully terminate its lease in accordance with its break clause.

Break clauses frequently cite payment of rents and delivery of vacant possession as pre-conditions to the break being effective. Such was the position in this case, however the specific drafting provided that, in addition to ensuring the tenant was not in arrears, the lease would terminate:

  • Clause 23.1: “subject to the tenant being able to yield up the premises with vacant possession as provided in clause 23.2
  • Clause 23.2: “On the expiration of such notice the term shall cease and determine (and the tenant shall yield up the premises in accordance with clause 11 and with full vacant possession)…”
  • Clause 11.1: “Unless not required by the landlord the tenant shall at the end of the term, remove any alterations or additions made to the premises (and make good any damage caused by that removal to the reasonable satisfaction of the landlord) and shall reinstate the premises to their original layout and to no less a condition than as described in the Works Specification.”

On the one hand, the landlord argued that these clauses made clear the standard to which “yielding up with vacant possession” would be assessed, in order for the tenant to satisfactorily comply with the pre-condition to break. That meant reinstating the premises to its original layout.

On the other hand, the tenant argued that clause 23.2 did not add further conditionality to clause 23.1 and that the tenant must simply yield up the premises with vacant possession in the usual way. The words in brackets in clause 23.2 explained the consequences of exercising the break and the drafting was there as a reminder to the tenant that the yielding up standard set out in clause 11 would still apply upon operation of the break. The parties had not agreed to impose an additional layer of conditionality to the break.

The decision

The court commented on the fact that, if the landlord’s interpretation was correct, even a trivial failure to reinstate to the standard set out in clause 11 would invalidate the break. This would mean the tenant would be locked into paying another five years’ rent at £4 million per annum. The court considered that outcome to be extremely draconian for the tenant and accordingly that the landlord would need to have provided much clearer and more precise drafting if that had been its intention.

Comment

The results in these two cases highlight how nuanced – and difficult to predict – questions of construction can be: in Bella Italia, a literal construction of the lease was adopted, whereas in Goldman Sachs, the court took a purposive approach, taking into account an overriding principle of fairness in assessing how to construe the relevant clause. The distinction is likely to be justified based on the fact that in Bella Italia the drafting was unambiguous (albeit arguably without any commercial purpose) and in Goldman Sachs the remit of clause 11 was simply too imprecise to apply as a pre-condition.

The landlord in the Goldman Sachs case has been given permission to appeal the decision to the Court of Appeal. As such, there may yet be an order that clauses 23.1 and 23.2, taken together, do in fact constitute a pre-condition as to reinstatement that the tenant must comply with in order to successfully operate its break, be that fair or unfair.

For more on the Bella Italia case, see our client alert

 *These are English cases and the position may be different in Scotland