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16 June 2014

Break Clauses – “Form versus Content”

Break clauses are a subject that will not go away.  A useful reminder of the need to take particular care when negotiating terms at the outset, and strictly complying with them when exercising a break, is provided by the case of Friends Life Limited -v- Siemens Hearing Instruments Limited [2014].

The wording of the break was slightly unusual stating that:

“Subject to the preconditions in clause 19.3 being satisfied on the termination date, and subject to clause 19.4, the tenant may determinate the term on the termination date by giving the landlord not more than 12 months and not less than 6 months’ written notice, which notice must be expressed to be given under section 24(2) of the Landlord & Tenant Act 1954.  The term will then determine on the termination date, but without prejudice to any rights of either party against the other for any antecedent breach of its obligations under this lease.”

On the purported exercise of the break, the tenant’s solicitor failed to specify that it was given under section 24(2) of the Landlord & Tenant Act 1954 and tried to argue, before the Court, that as the wording was meaningless, the omission made no material difference.

The case turns the spotlight once again on the difference between the form and content of notices, the former being subject to strict compliance, and the latter less so.

The principle from the Mannai Investment Co Ltd -v- Eagle Star Life Assurance Co Limited [1997] UKHL19 case will not save the tenant’s bacon where the form specified in any condition for the serving of the notice has not been strictly complied with.  Mannai upheld a notice to break even, though the date of the break specified in the notice was incorrect, on the basis that a reasonable landlord would not have been misled by the error.

However, the distinction between form and content was emphasised in the Mannai case by Lord Hoffman when he stated:

“… if the clause had said that the notice had to be on blue paper, it would have been no good serving the notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.”

The effect for tenants (and their advisors) of making an error in serving break notices is drastic and, in the case of Siemens, the lease had a further 10 years to run, and the notice was held by the Court to be invalid.

The words of Lord Justice Lewison in the Siemens case should be heeded by both tenants and their advisors, namely:

“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 a clause, including the formal requirements, and follow them precisely.”