Mannai Investment Co Ltd v. Eagle Star Assurance

The tenant served notices under a break clause (clause 7(13)) which required notices "to expire on the third anniversary of the term commencement date". The notices incorrectly stated the termination date as 12 January 1995 when the correct date was 13 January 1995. The Court of Appeal held the notices ineffective. The House of Lords (majority) allowed the appeal and held that a notice will be valid if, objectively construed in its commercial context against the terms of the lease, it is sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt how and when it is intended to operate.

The decision adopts the test stated by Goulding J. in Carradine Properties Ltd v Aslam: whether a reasonable recipient would be left in no reasonable doubt as to the effect and timing of the notice. The House rejected the rigid application of the older line of authorities epitomised by Hankey v Clavering and Cadby v Martinez, which required that the notice must comply 'on its face' with the contractual specification regardless of obvious slips. The judgment also held that Sidebotham v Holland did not assist the tenant.

The appellant tenant held two ten-year leases containing an identical break clause (clause 7(13)) entitling the tenant to determine the lease by at least six months' written notice "to expire on the third anniversary of the term commencement date". The term commencement date was "from and including 13 January 1992" and therefore the third anniversary was 13 January 1995. On 24 June 1994 the tenant served two identical letters stating that, "Pursuant to Clause 7(13) of the Lease we as Tenant hereby give notice to you to determine the lease on 12 January 1995." The tenant sought a declaration that the notices were effective to determine the leases on 13 January 1995.

Procedural history: at first instance Judge Rich Q.C. held for the tenant invoking Sidebotham v Holland; the Court of Appeal reversed ([1995] 1 W.L.R. 1508) holding the notices ineffective; the tenant appealed to the House of Lords.

Issues framed:

• whether the notices, despite specifying the wrong day, were valid as a matter of construction (the construction point);
• whether the notices were saved by the special rule in Sidebotham v Holland.

The House of Lords answered the Sidebotham point negatively. By a majority (Lords Steyn, Hoffmann and Clyde) the House held that notices under break clauses should be construed objectively in their commercial context and that the correct test is whether a reasonable recipient, having the lease and the relevant background in mind, would be left in no reasonable doubt how and when the notice was intended to operate. Applying that test, the majority held the tenant's notices were sufficiently clear to determine the lease on the correct contractual date. The majority also considered that the older strict approach, exemplified by Hankey v Clavering and supported in dissenting speeches by Lords Goff and Jauncey, should no longer be followed because modern commercial interpretation allows background to be used to construe unilateral notices and that the strict rule produced artificial and commercially surprising results.

The dissenting opinions emphasised the long line of authority requiring strict compliance with specified notice provisions, arguing that the dates in the notices did not conform to the clause and that the established certainty of the older rule should not be disturbed.

Wider implications: the majority modernised the law on construction of unilateral contractual notices in commercial leases by overruling or departing from Hankey v Clavering and related authorities and endorsing an objective, contextual test akin to that applied to commercial contracts.

Appeal allowed. The majority held that notices under break clauses must be construed objectively in their commercial context; a notice is valid if a reasonable recipient, with knowledge of the lease and relevant context, is left in no reasonable doubt how and when the notice is intended to operate. The notice specifying 12 January 1995 was therefore effective to determine the lease on the contractual third anniversary (13 January 1995). The House rejected reliance on Sidebotham v Holland and departed from the rigid rule in Hankey v Clavering.

First instance: His Honour Judge Rich Q.C. (Chancery Division) — held notices effective. Court of Appeal — reversed, held notices ineffective (Mannai Investment Co. Ltd. v. Eagle Star Insurance Co. Ltd. [1995] 1 W.L.R. 1508). House of Lords — appeal allowed ([1997] UKHL 19).