Serving a break notice during a pandemic

Insights - 30/09/2020

Serving break notices is not straight forward at the best of times. But, doing it in the middle of a global pandemic is even more difficult and presents new challenges. This article takes a closer look at these challenges, as well as revisiting some of the more historic difficulties in this deceptively difficult area.

Starting with some of the basics, a break notice is a written notice given by one party to another to bring a lease to an end before its contractual end date. The terms on which such notice should be given are governed by the provisions of the lease and failure to comply with these can render the notice invalid. The law on compliance is unforgiving and the Court is not afraid to strike down a notice on the grounds of seemingly innocuous mistakes. When you consider that most break rights are one-off opportunities and that trivial mistakes are usually incapable of rectification by the service of a corrective notice, the stakes are high, and the losses can be catastrophic.

The severity of the law in this area is neatly captured by the often quoted passage from Lord Hoffman in the leading case of Mannai Investment Co Ltd v. Eagle Star Assurance [1997]. He said:

If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease

In short, technicalities matter.

Identifying the correct server and recipient

One of the first obstacles is making sure that the notice is served by, and served upon, the correct server or recipient. This may seem like an obvious point, but, as the parties to a lease can change over time, this is an area in which parties have become unstuck. In one well known Scottish case (Ben Cleuch Estates Ltd v Scottish Enterprise [2006]), a notice was served at the correct address for the landlord, but was held to be invalid because it was in the name of the landlord’s subsidiary company. It mattered not that the landlord and the subsidiary company shared the same registered office and shared the same directors. Because the wrong company name was used, the notice was invalid.

In the Ben Cleuch case, the confusion in identifying the correct landlord appears to have stemmed from a restructuring of the landlord company and subsidiaries. With the climate of uncertainty that many commercial organisations are facing (particularly those involved in property ownership) we are quite likely to see many commercial landlords reorganising their structure. Sadly, it is also highly probable that many businesses will fall into insolvency. Therefore, it is very likely that the landlord’s interest in lease could change hands very quickly and more than once.

All if this creates room for error and uncertainty and means that extra care should be taken to identify the correct parties.

Ensuring effective service

It is one thing to identify the correct parties, but you must also ensure that those parties are properly served. Under the common law, the notice has to be physically and actually received by the recipient. Placing the notice in the hands of the postal service is not, of itself, sufficient.

As a result of the obvious difficulties for the server of a notice, legislation has been brought in to make life slightly easier. These statutory provisions provide for “deemed service” which means that, in certain circumstances, a notice is considered to served, even if it is not actually received by the appropriate recipient. However, this failsafe may not be available if the letter is returned undelivered. Whilst this may be rare under normal conditions, in the current climate the risk of failed and returned deliveries is very real.

Closed offices and skeletal staff increase the chance of returned mail and as this typically only happens after a number of delivery attempts, it could be weeks before the notice is returned, by which point the break deadline has very likely passed.

Another problem that we have seen in this area is serving notice abroad in circumstances where the deemed service provisions are not applicable. This requires actual service. At a time where there are strict border controls and safety measures in place, this can lead to difficulties and delays. Some countries have even closed their borders completely and we know from experience that this has caused delays of weeks, even months in the courier service. Very often notices are stalled in transit and, because of the ability to track the notice, it can be clearly seen that the notice has not even left the country. Creative thinking is often required to get around these problems.

Break notice conditions

On top of everything else, some break rights are subject to pre-conditions, for example; the payment of all rents and /or returning the premises with vacant possession at the break date. Like everything else, even trivial instances of non-compliance can render a break notice void.

The pitfalls in this area were illustrated in the recent case of Avocet Industrial Estates LLP v Merol Limited (2011). This was a case which involved a break right that was conditional on the payments of all rents, which was defined to include interest on arrears. It turned out that, at some point in the past, the rent had been paid late, thus attracting interest in the sum of £130. This interest was never demanded by the landlord, and therefore never paid. As a result of the paltry arrears, the break notice was held to be ineffective and the tenant was still liable to pay rent at the rate of £67,500 for a further 5 years.

Cases like Avocet are not isolated incidents and landlords are perfectly entitled to hold tenants to high standards imposed by the law in this area.

With many predicting a deep recession, and a move away from traditional office working, it seems inevitable that there will be an upsurge in commercial tenants serving notice to terminate their leases. If past experience is anything to go by, this upsurge is likely to be met the kind of resistance and “nit picking” that was seen in cases like Avocet. As a result, there is an even greater need to ensure absolute compliance with break conditions.

So, whether you are a landlord, or a tenant and you are thinking of serving or have been served with a break notice, the message is simple. Do not become a cautionary tale. Act quickly and get advice. 

If you have any questions or queries relating to the above article please don’t hesitate to contact Graham Halsall, Partner in our Property Disputes team by email on [email protected] or another member of the Dispute Resolution team. 

Other articles from September's newsletter

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.