+44(0)20 7638 9271

Articles

Articles

Conditional Break options In Property Leases: Siemens Vs Friends

Post Scriptum: This decision was reversed on appeal, and the tenant’s break notice declared invalid by reason of its failure to follow the strict wording of the terms of the break clause in the lease, Lord Justice Lewison saying “The clear moral is: if you want to avoid expensive litigation, and the possible loss of a valuable right to break, you must pay close attention to all the requirements of the clause, including the formal requirements, and follow them precisely“.

The recent case of Siemens Hearing Instruments Ltd -v- Friends Life Ltd [2013] EWHC (ChD)(unreported)(12 July 2013) provides an important clarification as to tenants’ compliance with conditions applicable to the operation of break clauses in property leases.

A break clause is a contractual provision in a lease which allows either the landlord or the tenant to bring the lease to an end on a date earlier than the contractual end date. Such provisions are typically operated by the service of a notice confirming the sender’s desire to end the lease early. Provisions allowing the tenant to end the lease regularly contain conditions. Tenants’ failures to comply with such conditions are often used by landlords to challenge the valid operation of the break clause, thereby prolonging the life of the lease. The Court in Siemens has confirmed that a tenant’s failure to comply exactly with such conditions may not always invalidate the operation of the break clause.

However, although the Court in Siemens confirmed the validity of the tenant’s break notice notwithstanding the tenant’s failure to comply exactly with the conditions of the break clause, the fact that the issue had to be resolved by a Court, with all of the uncertainty and expense that that involves, highlights the importance of compliance with the requirements of a lease when exercising a break clause.

Sun Life Assurance Society PLC (which later became Friends Life Assurance Society Ltd) (“Friends”) entered into a lease as landlord with A&M Hearing Ltd (which later became Siemens Hearing Instruments Limited) (“Siemens”) as tenant on 24 August 1998. The lease contained a tenant-only break clause allowing Siemens to terminate the lease on 23 August 2013 by giving not more than 12 and not less than 6 months’ prior written notice to Friends. The lease provided that the notice had to be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954 (the “Act”).

Siemens served a notice on Friends in September 2012 to break the lease on 23 August 2013. The notice did not state, as required by the lease, that it was given under section 24(2) of the Act. Friends argued that the break notice was defective and that the reference to section 24(2) of the Act was there to prevent Siemens from exercising the break and then applying for a new tenancy under the Act. If Friends was right, Siemens’ liabilities under the lease, including the obligation to pay rent, would continue beyond 23 August 2013.

The Court reviewed two relevant cases, Newbold and other –v- Coal Authority [2013] EWCA Civ 584 which discussed, inter alia, the effects of non-compliance with statute or  contractual requirements and Cusack v London Borough of Harrow [2013] UKSC 40 which dealt with the construction of legislation and contracts and held that certain requirements within legislation or contract were mandatory and certain requirements directory. A failure to comply with a mandatory provision was fatal to the action, whereas failure to comply with a directory provision may have adverse consequences but was not necessarily fatal.

The Court in Siemens held that each case must be considered on its facts but made a broad statements of principle that failing to comply with strict wording of a contract provision relating to the service of the notice might not always be fatal to the validity of the notice. It held that Siemens’ notice was valid because the break clause in the lease did not expressly mention that failure to refer to Section 24(2) of the Act would be fatal to the operation of the notice, whereas it did state that failure to comply with other conditions would be fatal.

Furthermore, Siemen’s failure to refer to Section 24(2) of the Act did not make any difference to the landlord, as Siemens could not, in any event, apply for a new tenancy under the Act after giving notice to end the lease – under well-known legal authority, the giving of the notice operated to end its entitlements in that respect under the Act. The words required by the clause were therefore were not necessary to protect the landlord’s position.

Whilst the fact that the Court upheld the validity of Siemen’s break notice in this instance, it remains vital to ensure that conditions in break clauses are complied with to ensure the valid operation of the break and to avoid costly disputes and uncertainty.

For further information, please contact Julian Johnstone, head of Druces LLP’s Litigation & Dispute Resolution team.

This note does not constitute legal advice. It is intended as general guidance only and is correct as at 2 August 2013.

Share this article: