UK: An Overriding Omnishambles: Recent Break Clause Developments

Two recent cases provide salutary lessons in how to serve break notices and also in how to draft them. The firmament of break clause cases has been so enriched in recent years with cases such as M&S and Ibrend that fanatics of break clause litigation will have had their thirst slaked. However, this is a rich seam and two recently unearthed gems merit consideration.

Vanquish Properties (UK) Limited Partnership v. Brook Street (UK) Limited [2016] EWHC 1508 (Ch)

Background

The City of London (City) granted Brook Street a 10-year lease in 2011. The lease contained a landlord's break option allowing termination on not less than six months' notice. In March 2016, City granted Vanquish Properties (UK) Limited Partnership acting by its general partner, Vanquish Properties GP Limited, an overriding lease of the property, so that Vanquish became Brook Street's immediate landlord.

No doubt keen to enjoy its exciting new bundle of legal rights, immediately upon the grant of the overriding lease, Vanquish sought to determine Brook Street's interest in the property by exercising the break right. The notice stated:

Issues

There were two key issues: (i) who was the landlord for the purposes of serving the break notice? and (ii) what would the reasonable recipient of the notice understand it to mean?

Who was the Landlord?

This is not a question that should often be asked. It is usually blindingly obvious who the landlord is. However, in this case the question of legal personality and the law concerning trustees and partnerships combined to complicate matters.

Question – when is your landlord not a landlord? Answer, when it is a limited partnership.

A limited partnership does not have a separate legal personality and therefore cannot hold a legal estate in land. Therefore, on the face of it, Vanquish Properties (UK) Limited Partnership could not, in its own right, be the landlord and by extension could not serve the break notice.

In scratching for an argument, Vanquish submitted that the limited partnership could still be the landlord as the overriding lease could be construed as being granted to the first four named partners of the partnership in accordance with the provisions of the Trustee Act 1925 and/or the Law of Property Act 1925. This was struck down as there were more than four partners and the intentions as to who would hold the legal estate were not known. More importantly, only one partner was named in the overriding lease. Therefore, whilst the legal estate could vest in a maximum of four partners as trustees, the statutory deeming provisions vesting legal title in the first four named partners were not engaged as only one partner had actually been named in the relevant document.

Despite digging up this clever argument, Vanquish's speculative efforts were in vain. The only other entity that could be the landlord was the general partner. Unfortunately, the general partner was not referred to on the break notice. In other words, the break notice had not been served by the landlord as it was required to be and was therefore void.

What would the reasonable recipient have understood?

One of the key break clause cases is Mannai Investment Co Ltd v. Eagle Star Life Assurance Co Ltd [1997] (the break clause equivalent of the Cullinan I diamond). Mannai introduces the concept of the reasonable recipient and what such recipient in possession of relevant context would have understood the notice to mean.

On the facts, would the reasonable recipient of a notice stating the landlord was the limited partnership understand it that it actually intended to refer to the landlord as being the general partner?

The Court held that the reasonable recipient would not so understand the notice. The relevant content would not have made it clear that the notice should have referred to the general partner. The reasonable recipient would have been unlikely to undertake a legal analysis to understand who the landlord actually was. Chief Master Marsh held that the reasonable recipient knowing that the legal estate could not be held by the limited partnership would be puzzled by what the notice meant. There was no evidence of an intention to give notice on behalf of the general partner or that the sender of the notice was authorised by the general partner to send the notice. Accordingly, Mannai did not rescue Vanquish from the big pit it found itself in – its defective notice being "merely a scrap of paper with no effect".

Levett-Dunn v. NHS Property Services Ltd [2016] EWHC 943 (Ch)

This case concerned effective service of a break notice.

NHS Property Services Ltd's statutory predecessor in title was tenant of three floors of a building pursuant to three almost identical leases each granted by the same four joint landlords. In each lease all four joint landlords were stated as being of the same address.

For the purpose of service of notices, each lease incorporated section 196 of the Law of Property Act 1925. This is not uncommon. Section 196 allows for service by hand or registered letter at the last known place of abode or business of the landlord.

Each lease contained a tenant's break right. In 2012 the tenant sought to exercise its break rights in all three leases and to this end sent four separate break notices (one for each joint landlord) by recorded delivery to the address given in the leases (i.e. the address of the fourth landlord). The notices were signed for.

The effectiveness of service was challenged on the following grounds:

• at the time they were granted, the address given in each lease for the joint landlords was not in fact the place of abode or business for three of the four landlords. At that time, only one of the four joint landlords had any real business connection with the address given; and
• at the time the break right was exercised the fourth landlord was no longer a joint landlord. Consequently, even if it could be argued that the notices had been served upon him (because the address used was his place of business) they were ineffective as he was not a joint landlord at the relevant time.

On the first point, the Court held that service on the joint landlords at the address given in the leases was effective service. In the words of the judge, "the address given is an 'abode' or 'place of business' because the landlord has, on the true construction of the leases, nominated it as such, and not because, in any other sense, the landlord actually abided there or carried on any business there. That being so, it remains such a place until the landlord nominates some other address or, perhaps, the tenant acquires actual knowledge that it cannot be an address at which the landlord can be reached".

In other words the address specified in the lease was deemed as being the relevant place of abode or business in absence of any other address. If a landlord fails to update a tenant as to a change in address "it is not unreasonable that any risk that the documents do not in fact reach him falls on him".

On the second point, the Court declined to extend the operation of section 23 (2) of the Landlord and Tenant Act 1927 to this case. In summary, section 23 (2) provides that where a tenant has not received notice that it has a new landlord, service on the former landlord can be effective. The Court felt that this provision was not of general effect and was instead restricted to notices pursuant to the Landlord and Tenant Act 1927.

Given the conclusion on the first point, however, the tenant ended up with a polished result and an effective break.

Conclusion

In conclusion, law firms, companies, partnerships, legal personalities and non-legal personalities will continue to find novel ways in which to create new break right precedent. At the risk of sounding overly topical, this may be more pronounced in the post-Brexit world where, for example, landlords are more likely to scrutinise break notices to find faults in order to preserve their existing rental streams.

There are ways to minimise exposure to break right problems, including:

• Knowing when a break can be exercised and allowing time to prepare the notice and serve it;
• (Self-interest noted) instructing solicitors early to prepare and serve notices and advise on any conditions to the exercise of the break;
• Checking all of the legal documentation. Has the lease been varied? Are there any side letters? Has there been any notification that the other party has changed its address?
• Ensuring all arrears, including of interest, are known about and paid up to date (whether demanded or otherwise);
• For tenants, ensuring vacant possession is delivered on or before the break date (do not carry out dilapidations works unless it is a specific condition or such works will be carried out long before the break date);
• At lease drafting stage, specifying that service at the named address in the lease is valid service;
• During the term of the lease, ensuring that any changes of address for service are promptly and correctly notified to the other party;
• Checking that the correct entity gives the notice and, correspondingly, that the correct entity receives the notice;
• Avoiding the need to rely on Mannai.

There are no doubt other golden nuggets of advice out there. Given the importance of break rights, the narrow way in which such rights can be validly exercised, the dire consequences of getting it wrong (e.g. a tenant being potentially stuck with an unwanted lease and the associated liabilities attaching to the end of the term or the next break date), and the current macro-economic conditions, break clause precedent will continue to be extracted on an open-cast basis.

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