Fitzroy House Epworth Street (No. 1) Ltd. & Anor v The Financial Times Ltd.

A tenant materially complies with lease obligations governing a break clause when, assessed objectively, any remaining breaches do not materially impair the landlord’s ability to relet or sell the property without delay or additional expenditure. The parties’ conduct, motives, efforts and relative fairness are irrelevant to that question.

The word “materially” relaxes the strict rule applicable to an unqualified condition precedent. Its effect is not confined to excusing only breaches labelled trivial or trifling. Applying this ordinary English word to established facts is primarily a factual exercise.

The landlords leased an office building to the tenant under a lease permitting the tenant to terminate on 1 April 2004 if it had materially complied with all its obligations. The tenant gave notice, undertook substantial repair works and vacated. The landlords contended that outstanding breaches prevented termination.

HH Judge Thornton QC declared that the lease had terminated. He found residual repairing breaches worth no more than £20,000, with no substantial effect on reletting terms, but applied a fairness-based approach derived from Commercial Union Life Assurance Co Ltd v Label Ink Ltd.

The landlords appealed, arguing that the judge had adopted the wrong legal test and had drawn unsupported conclusions. The central issue was the objective meaning and application of “materially complied”.

1. Appeal dismissed unanimously. Although the trial judge had applied the wrong legal test and considered irrelevant matters, the tenant had materially complied with its lease obligations on the facts found. The lease therefore terminated on 1 April 2004.

2. The fairness-based approach in Commercial Union Life Assurance Co Ltd v Label Ink Ltd [2001] L & TR 29 was wrong. “Material” does not mean whatever is fair and reasonable between landlord and tenant. The tenant’s efforts to comply, the landlord’s refusal to participate in the repair programme, the parties’ motives and the perceived fairness of allowing termination were irrelevant. Material compliance must be determined objectively.

3. An unqualified condition requiring performance of covenants must be strictly satisfied. A subsisting breach, even if trivial, prevents the exercise of the relevant option. The insertion of “materially”, however, mitigates that absolute rule. Its effect is not limited to permitting only breaches described as trivial or trifling, since those substituted expressions are themselves uncertain and were not the parties’ chosen words.

4. The commercial context identified in Bass Holdings Ltd v Morton Music Ltd [1988] 1 Ch. 493 supplied the relevant benchmark. Materiality is assessed by reference to the landlord’s ability to relet or sell the property without delay or additional expenditure. Depending on context, “material” and “substantial” may be interchangeable. “Reasonable” denotes a different test.

5. The trial judge was entitled to find that the remaining defects were minor or trivial, had a maximum value of approximately £20,000 and caused negligible or no damage to the reversion. The evidence supported the finding that they would not deter a prospective tenant or substantially alter the agreed terms. Any possible adjustment represented only about nine days against rent-free periods measured in years.

6. Applying an ordinary English word such as “materially” to established primary facts is a question of fact. On the permissible findings, the residual defects did not prevent material compliance. Jacob LJ and Moore-Bick LJ agreed with the Chancellor.

1. Court of Appeal (Civil Division): The landlords’ appeal was dismissed. The court rejected the trial judge’s fairness-based test but upheld his declaration because the tenant had materially complied when the correct objective test was applied. [2006] EWCA Civ 329

2. Technology and Construction Court: HH Judge Thornton QC declared on 4 November 2005 that the lease had terminated on 1 April 2004 pursuant to the tenant’s notice. No neutral citation is stated in the judgment.