Summary and implications
The power is back with the landlords. After the dust has settled on two important Court of Appeal decisions relating to tenant's break options, it is now the case that:
- unless there is an express apportionment clause, it will be difficult for a tenant to argue that it should be entitled to an apportioned refund for rents and other sums paid in advance of, but which relate to the period after, a break date (the broken period); and
- non-compliance with a mandatory requirement of a break clause (or any other option) will render a break notice invalid.
2013: the year of the tenant
2013 saw two tenant-friendly decisions:
- First, there was Marks and Spencer v BNP Paribas, where it was held that the landlord did have to repay an apportioned amount of rent and other sums which related to the broken period.
- Second, there was Siemens v Friends Life where it was held that non-compliance with the strict requirements of a break option, in terms of the form of notice, did not render the break notice invalid.
2014: the year of the landlord
If 2013 was the year of the tenant, 2014 has clearly been the year of the landlord. In both cases, the Court of Appeal weighed in and, in both cases, decided in favour of the landlord.
In the Friends Life case, the Court of Appeal unanimously overturned the first instance decision and held that a notice to exercise a break option is invalid where the strict requirements of the option are not met. This is the case even where the missing information or defect has no practical effect on, or detriment to, the landlord receiving the notice.
In the Marks and Spencer case, the Court of Appeal, again, unanimously found in favour of the landlord: on the facts of this case, there was no implied term. Therefore the landlord did not have to repay an apportioned amount of rent and other sums which related to the broken period.
Why do break clauses matter?
Tenant options are a well-trodden battleground for landlords and tenants.
Against the background of a challenging economy, it is easy to understand why: the tenant wants to exercise his break to offload a rental liability. Perhaps because he no longer needs the premises or perhaps because the premises are significantly over-rented when compared to current market rents.
The landlord has an equal but opposite interest: he wants to keep the tenant committed under the lease. He knows that, if the premises become vacant, he may struggle to fill the void. Or, at a minimum, the level of rent he could expect to receive will be significantly lower if he has to re-let the premises.
Friends Life v Siemens
In essence, the decision gives back to landlords the ammunition (and opportunity) to pore over the minutiae of a break notice and exploit any failure to meet a mandatory requirement, however small, to challenge whether a tenant has validly exercised his break option.
The battleground now will be which parts of break clauses are mandatory, or requirements, or pre-conditions, and therefore must be strictly adhered to and which parts are not (meaning that there may be some leeway).
The High court decision: the notice was valid
The High Court had previously held that a tenant's break notice was valid even though the notice made no reference to section 24(2) of the Landlord and Tenant Act 1954 (the 1954 Act). The break option in the lease provided that the notice must be "expressed to be given under section 24(2) of the Landlord and Tenant Act 1954".
The reference to the 1954 Act added nothing of substance to the break option and the landlord was in no way affected by the omission. The judge decided that:
- the break notice was defective for the failure to refer to section 24(2); but
- the defect in the notice did not make it invalid.
The Court of Appeal decision: the notice was, in fact, invalid
In a decision which may cause dismay to tenants (or indeed any party wishing to exercise an option) the Court of Appeal unanimously allowed the landlord's appeal.
In holding that the reference to the 1954 Act was a mandatory requirement of the break option and that the omission did make the notice invalid, the Court of Appeal has re-affirmed some well-established principles:
- a break clause is an option;
- an option must be strictly construed. If the option contains any requirements, those requirements must be completely fulfilled; and
- there is no room for any "permitted" or "excusable" non-compliance.
The Friends Life case is a reiteration of the famous statement from Lord Hoffmann in Mannai Investments v Eagle Star: if a clause requires a notice to be sent on blue paper, then a notice on pink paper is invalid, no matter how clear it may be that a tenant wants to terminate the lease.
Marks and Spencer v BNP Paribas
The Court of Appeal's decision does not change the law. The only question on appeal was whether, in the absence of an express clause and in the light of the relevant background (including the other terms of the lease), the court could imply into Marks and Spencer's lease a term which said that it was entitled to an apportioned refund of money paid in advance, but which related to the broken period.
The case does not change or develop the test that a judge must apply when deciding whether to imply a term into a contract. Rather, the Court of Appeal disagreed with the High Court about whether, when considering the relevant background, the test had been met.
It is important to note that these cases are fact-specific. However, the Court of Appeal's decision does seriously undermine the force of a tenant's potential argument that, even though its lease does not contain an express apportionment clause, it should nevertheless be entitled to an apportioned refund for money paid for the broken period. The ability to hold fast and refuse refunds is firmly back with the landlord.
Interestingly, and whilst not formally deciding the point, the Court of Appeal possibly laid the foundations for an argument that if it is known at the quarter day before the break that the break will operate, then the tenant may be able to reduce the rent payable so that it pays the relevant apportioned amount (i.e only the rent payable from the quarter day until the break date).
However, it would be a brave tenant who dares to test this point in circumstances where it has a "once and for all" conditional break and the consequences of failing to operate the break successfully will leave it on the hook for a number of years. It is also very rare to have a break clause that the parties know in advance will operate on the break date as most breaks are conditional on, at a minimum, the tenant giving up occupation. Therefore, this point (and the court's subtle hints) may only be relevant in a limited number of break cases.
Practical steps
If you are a tenant, or if you act for a tenant:
- Pay close attention to all the requirements of a break option and follow them precisely. This is the case even if you consider that a particular requirement is valueless or redundant. To do otherwise risks the loss of a valuable break option and the potential for expensive litigation.
- Negotiate into the lease an express apportionment clause to deal with a refund of the money paid in advance but which relates to the broken period. This is increasingly common, especially in recent years where tenants have had a stronger bargaining position, and removes a potential dispute.
If you are a landlord, or if you act for a landlord:
- Pore over the minutiae of a break option to check that a notice from a tenant purporting to break the lease is valid.
- Take a firm stance in response to any tenant who demands a refund of any money paid in advance, but which relates to the broken period, if there is no express apportionment clause in the lease.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
