Friends Life Ltd v Siemens Hearing Instruments Ltd

An option to break a lease is a unilateral contract. Every contractual condition governing its exercise must be fulfilled precisely. The court cannot excuse substantial or purposive compliance merely because the omission causes no prejudice or defeats no statutory purpose. Flexible approaches applicable to some statutory notices do not permit non-compliance with an option clause. Construction remains important: where a clause prescribes only the meaning a notice must convey, ordinary objective interpretation may suffice. Where it requires the notice to be expressed in a specified form, that formal requirement must be met. A notice omitting the required expression is ineffective.

The tenant held a 25-year commercial lease containing a break clause. The clause required any break notice to be expressed as given under section 24(2) of the Landlord and Tenant Act 1954. The tenant served a notice exercising the break but omitted that reference. The High Court held the notice valid: although non-compliant in form, it achieved the clause’s purpose and caused no prejudice. The landlords appealed. The central issue was whether the formal wording requirement was mandatory and, if so, whether substantial or purposive compliance could preserve the notice.

The appeal was allowed. Lord Justice Lewison delivered the leading judgment, with Lady Justice Black and Sir Timothy Lloyd agreeing. The tenant’s notice was ineffective because it omitted the express reference required by the break clause.

1. A break clause is a unilateral, or if, contract. The event which triggers the promisor’s obligations must comply fully with the contractual description. Substantial compliance is insufficient, even where the omission is trivial or causes no prejudice. This followed the analysis in United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74 and the established approach to options, including United Scientific Holdings Ltd v Burnley BC [1978] AC 904. The same principle applies to break clauses as to options to renew.

2. The court must first construe the option clause. Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 949 concerned a notice which complied with the clause when properly interpreted; it did not create a doctrine of excusable non-compliance. Authorities such as Yates Building Company Ltd v RJ Pulleyn (York) Ltd [1976] 1 EGLR 157 and Rennie v Westbury Homes (Holdings) Ltd [2007] EWCA Civ 1401 were cases where the clauses prescribed the meaning to be communicated, rather than imposing the omitted formal requirement.

3. The flexible mandatory-directory analysis applicable to some statutory or contractual notices did not displace the special rule for options. The observations in Newbold v The Coal Authority [2013] EWCA Civ 584 and the reasoning in Petch v Gurney [1994] 3 All ER 731 did not justify excusing non-compliance with an option clause.

4. Section 24(2) of the Landlord and Tenant Act 1954 preserved the tenant’s ability to terminate by contractual notice to quit. Section 69 treated a break notice as a notice to quit. Those statutory consequences did not satisfy the separate contractual requirement that the notice be expressed to be given under section 24(2). The notice contained no reference to that provision and therefore failed both the formal and substantive requirements of the clause.

• Court of Appeal (Civil Division) — allowed the appeal and held the break notice ineffective: [2014] EWCA Civ 382.
• High Court, Chancery Division — held that the notice was valid: [2013] EWHC B15 (Ch).