England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice
		25th February 2010

MR. JUSTICE LEWISON:

1. The service of notices exercising options still causes trouble. The question in this case is whether W&J Linney Limited ("Linney") have successfully operated a break clause in a lease. The basic facts are not in dispute and the question is one of law.
2. On 4th April 1996 Mansfield District Council demised Plot 3 Crown Farm Way, Crown Farm Industrial Park in Mansfield to Sun Alliance Trust Company Limited for a term beginning on 4th April 1997 and expiring on 29th September 2116. On 6th June 1997 that lease was assigned to Capita Trust Company Limited. On 4th February 2004 Capita granted a sub-lease of part of Plot 3 to Linney. That sublease demised the premises for a term of 10 years beginning on 4th February 2004 at an initial rent of £139,000-odd per annum.
3. In the lease the parties were described as follows: Capita Trust Company Limited, company number 239726; its principal offices at Field Hall House, 81/87 Gresham Street, London EC2V 7QE as trustee of the Laser 12 East Midlands Trust (the landlord). W&J Linney Limited was described as the tenant. Clause 1.1 of the lease contained a number of definitions. It starts with the words:

"In this Lease and in the Schedules the following words and expressions shall have the following meaning unless the context requires otherwise...":

The definitions included:

"'Landlord' means the party so described at the head of this Lease and where the context so admits the person for the time being entitled to the reversion immediately expectant on the determination of the term."

4. Clause 1.8 of the lease provided:

"Unless the context requires otherwise, references to 'the Landlord' shall be construed as including any person who the Landlord authorises to exercise its powers and functions under this Lease "

5. Clause 3 of the lease provided that rents were "... reserved and payable by the tenant to the landlord throughout the term". The lease continued with a number of covenants on the part of the tenant, including covenants against assignment without consent, the making of non-structural alterations without consent, the making of applications for planning permission without consent and so on.
6. Clause 7.13 of the lease was headed "Limitation of Landlord's liability", and started, in clause 7.13.1, with the following:

"The Landlord is entering into this Lease as trustee of the Trust and as such any liability on the part of the Landlord (which in this clause 7.13 shall include only its successors in title as trustee of the Trust) under or pursuant to this Lease is limited to the assets held on the Trust for the time being by the Landlord as trustee of the Trust and which are in the Landlord's possession or under its control at the date of any claims ("The Trust Assets") and the Landlord shall not incur any further liability after it shall have parted with its reversion of the Lease."

7. Clause 9 of the lease, headed "Break Clause", stated:

"If the Tenant wishes to determine this Lease on the 5th anniversary of the date of this Lease and shall give to the Landlord not less than six months' prior notice in writing to such effect, then upon the fifth anniversary of the date of this Lease, and subject to the rents having been paid up until expiry of the notice, and vacant possession being given upon that date, then this Lease shall come to an end but without prejudice to the respective rights of either party in respect of any antecedent claim for breach of covenant."

Accordingly in order to exercise the break clause the tenant had to give notice not later than 3rd August 2009 and had to give that notice to the landlord.

8. On 26th November 2004 Capita demised Plot 3 to Standard Life for a term beginning on 4th April 1997 and expiring on 26th September 2116. Standard Life paid Capita a premium of £4 million. The reserved rent is a peppercorn. Accordingly Capita's remaining interest in the premises is therefore limited to three days in 2116. The lease granted by Capita to Standard Life is called a concurrent or overriding lease, or a lease of the reversion. Standard Life's title to the overriding lease is registered and the official copy of the registered title records that Standard Life's interest is subject to the lease.
9. Since 2004 Standard Life has demanded rent from Linney, and Linney has paid the rent to Standard Life. When consent to alterations was required under the lease, the draft licence named Standard Life as the landlord. The evidence in this case includes documents recording demands for rent sent by Standard Life direct to Linney which demands were paid and the draft licence to which I have referred.
10. In the summer of 2008 Linney decided that it wanted to exercise the break clause. That meant, as I have said, that notice had to be given to the landlord by the 3rd August 2008. On 23rd July 2008 Linney's solicitors, Brown Jacobson LLP, wrote to Capita at its registered office in Beckenham. The letter was sent by recorded delivery. The letter said:

"Dear Sirs,

"Our client: W&J Linney Limited, re Units 1, 2 and 3 Windsor Court.

"We act on behalf of W&J Linney Limited and enclose by way of service our client's break notice in respect of the above property to terminate its lease on 4th February 2009. We should be grateful if you would acknowledge receipt of this notice by signing and returning the copy enclosed to us."

11. The notice enclosed with the letter is headed "Notice" and states as follows:

"This notice is given this 23rd Day of July 2008 to Capita Trust Company Limited on the Registry 34 Beckenham Road, Beckenham Kent BR3 4TU. Premises: Units 1, 2 and 3 Windsor Court, Crown Farm Industrial Estates, Mansfield Nottinghamshire, as more particularly described in the Lease. Lease, dated 4th February 2004 and made between (1) Capita Trust Company Limited and (2) W&J Linney Limited. Term, 10 years from 4th February 2004."

12. Clause 9 of the lease states that:

"If the tenant wishes to determine this Lease on the fifth anniversary of the date of this Lease and shall give to the Landlord not less than six months prior notice in writing to such effect, then upon the fifth anniversary of the date of this Lease and subject to the rents having been paid until expiry of the notice and vacant possession being given upon that date, then this Lease shall come to an end but without prejudice to the respective rights of either party in respect of any antecedent claim for breach of covenant. In accordance with these provisions we, Brown Jacobson LLP of Victoria Square House, Victoria Square Birmingham, B2 4BU, on behalf of W&J Linney Limited, hereby give you not less than six months prior notice in writing of their desire to determine the Lease on 4th February 2009 and they will on that date deliver up possession of the premises and will, prior to this date, comply with the conditions set out above."

The notice was signed by Grant Jacobson on behalf of W&J Linney Limited and contained the rubric at the bottom of the notice, "Received, a note of which this a true copy signed ..." - and then there was a blank space - "Capita Trust Company Limited".

13. On the same day Brown Jacobson wrote to Jones Lang LaSalle at St. Paul's House, Park Square in Leeds. The letter stated:

"Our client, W&J Linney Limited, your client, Capita Trust Company Limited. Re: Units 1, 2 and 3 Windsor Court. We understand that you act as agents of Capita Trust Company Limited and enclose a copy letter and notice sent to your client by recorded delivery today."

The enclosures were the letter and the notice to which I have referred.

14. On 11th August 2008, after the last date for exercising the break clause, Brown Jacobson wrote to Standard Life. That letter stated:

"We act for W&J Linney Limited and enclose for information a copy of the notice served on our client's landlord pursuant to clause 9 of the lease dated 4th February 2004 to terminate our client's tenancy on 4th February 2009."

15. Standard Life passed that letter to its solicitor, Addleshaw Goddard. There then followed an exchange of correspondence in which Addleshaw Goddard took the view that Standard Life was the landlord and that the notice ought to have been served upon Standard Life. Brown Jacobson took the view that the proper recipient of the notice was indeed Capita. The issue for me is whether either the communications of 23rd July 2009 has taken effect as a valid exercise of the break clause.
16. Mr. Seitler, QC , appearing for Linney, says that either or both of those communications were valid notices exercising the break clause. He says, first, that Capita were defined in the lease as "the Landlord" and that that definition continued to apply even after Capita ceased to be the holder of the immediate reversion. He accepts that this argument would apply in whatever manner the reversion changes hands, and is not limited to the rather unusual method adopted in this case - that is to say by the grant of an overriding lease. Second, although in his skeleton argument he said that the definition of "the Landlord" did not "admit" the inclusion of Standard Life for the purposes of the break clause, that argument was not pressed in oral submission. The consequence of that argument would have been that the only person on whom the notice could be served was Capita. Third, he said that service on James Lang LaSalle, as Standard Life's agent, was good service and that a reasonable recipient of the notice in the position of James Lang LaSalle, would have realised the reference to "Capita" was an obvious mistake.
17. The validity of the first argument is a question of construction of the lease. This entails deciding what a reasonable person, having all the background knowledge which would have been available to the parties and using the language of the lease, would have understood the clause to mean. The lease in the present case was clearly drafted by solicitors and I infer that Linney were also represented by solicitors. Background knowledge thus, in my judgment, includes the legal landscape and that in turn includes both common law and any applicable statutes.
18. That legal background includes a general knowledge of the function of a break clause. If I may quote what I said in Norwich Union Life & Pensions v Linpac Mouldings Limited [2009] EWHC 1602 (CH). Paras.43, 44:

"The relevant background knowledge would also, in my judgment, include a general nature of a break clause. A 'break clause' is an expression used to describe a right by written notice to terminate a lease on a date, usually called 'the break date', where, in the absence of such a notice, it would endure beyond the break date. Such a right is a right that is annexed to a lease or reversion as the case may be, and in the ordinary way passes to an assignee. In the ordinary way the purpose of the tenant's break clause is to enable the tenant in possession to bring the relationship of landlord and tenant to an end. Again, in the ordinary way, the person entitled to exercise the right is the person in whom the legal estate is vested. Speaking of tenant break clause, Neville J. said, in Stait v Fenner [1912] 2 Ch 504:

'In my opinion, the legal estate in turn being outstanding it was not competent for the lessee of any assignee of the lessee who had not the legal estate vested in him to give a notice.'

This is equivalent to the long established common law about notices to quit. The language of the licence must also be interpreted in a way that makes commercial sense. Commercial common sense is not merely a cross-check; it is an essential part of the process of interpretation. Commercial common sense must also be considered from the perspective of both parties."

19. The parties to the lease in the present case must also have been taken to have contemplated that the landlord might change. Not only is this part of the legal background to the grant of any lease, it is demonstrated by the terms of clause 7.13 of the lease in the present case.
20. At common law it has long been law that a notice to quit must be given to the person who is the holder of the immediate reversion. Where the original landlord is granted a concurrent or overriding lease, the holder of the immediate reversion is the lessee under the concurrent or overriding lease. Thus at common law any notice to quit would have had to have been served on Standard Life rather than on Capita.
21. In addition under s.3(l) of the Landlord & Tenant (Covenants) Act 1995 the benefit of all tenant covenants of the tenancy are annexed to the reversion and pass on the assignment of the reversion. In other words, the person entitled to

enforce the covenant is the reversioner for the time being. This is also made clear by s.3(3)(b) of the same act. Thus to take the reservation of rent in clause 3 of the lease, the lease required the rent to be paid to the landlord, but that, in my judgment, can only be the landlord for the time being. To my mind the construction that Mr. Seitler attractively advanced does not make commercial common sense. It would mean that the current reversioner could have his income stream removed from him without his knowledge. Someone who was once the landlord but no longer is would have no interest in checking whether the conditions applicable to the exercise of the break clause, whether as to timing or compliance with covenants, had been complied with and would have no interest in communicating with the current landlord. One of the conditions applicable to the exercise of the break clause is the giving of vacant possession. Vacant possession can only be given to the current landlord. It cannot, in my judgment, have been contemplated that the tenant could simply move out of the premises and return the keys to the landlord without having given him any notice of his intention to do so. Mr. Seitler says that to hold that the notice must be given to the current landlord is inconsistent with the words of the definition. The definition uses the word "and". That word cannot be read as meaning "or instead". There are, in my judgment, three answers to this submission. The first is that the lease itself provides that the defined term applies unless the context otherwise requires. The immediate context is the giving of notice to terminate the lease. In that context and against the background of the common law, the context does, in my view, require that the landlord be given the meaning of the holder of the current reversion. The second is that, in Lord Diplock's famous words, where the words of a contract flout business common sense, they must be made to yield to business common sense. The third is that the court should be slow to find that small inexplicit differences in language lead to a clause being construed contrary to the norm. See Bass Holdings Limited v Morton Music Limited, [1988] Ch. 494, quoted in Norwich Union Life & Pensions v Linpac Mouldings Limited at para.60. In my judgment that is the position here. In my judgment, therefore, the only person on whom a valid notice could be served was Standard Life. Accordingly I hold that the notice sent to Capita was of no effect.

22. In support of the argument that service on Jones Lang LaSalle was good service, Mr. Seitler relied on clause 1.8 of the lease. This applies to a person whom the landlord has authorised to exercise its powers and functions on the lease. The landlord's powers and functions under the lease include such matters as giving consent to assignments, sub-lettings and non-structural alterations, carrying out repairs where the tenant has failed to do so, consenting to planning applications and so on. The clause speaks of a person "authorised to exercise the Landlord's powers and functions under the Lease." Leaving aside the question of the word "and" in the phrase "powers and functions", this clause only applies to a person who is authorised actually to exercise those powers and functions. In other words, it contemplates the delegation of a decision-making power. There is no evidence that Jones Lang LaSalle had such a decision-making power. If this argument was to be pursued, it ought to have been clearly raised by the evidence.
23. Apart for the effect of clause 1.8, was the copy notice sent to Jones Lang LaSalle good service on Standard Life? Mr. Seitler accepts that in order to arrive at an affirmative answer to this question, it is a necessary step that James Lang LaSalle would have realised that the name Capita in the notice was an obvious mistake. An analogous question arose in the Morris, R (on the application of) v London Rent Assessment Committee [2002] 2 EGLR 13. A notice under Part I of the Landlord & Tenant Act 1954 was required to be given to the tenant of a flat. The tenant in possession at the date of the notice was a Mr. Fry. However, the notice was addressed to Mr. Barnby, who was the original tenant. He had assigned the lease of the flat to Mr. Fry some 15 years earlier. In para.11 of this judgment, Mummery L.J. said:

"The notice was not addressed to the tenant, Mr Fry, either expressly by name or implicitly by status as tenant. It was expressly and unambiguously addressed by name to an altogether different person, Mr HG Barnby. That was not a minor error or slip. Mr Barnby was not Mr Fry, and he was not, and had long ceased to be, tenant of the flat. The reaction of the reasonable tenant receiving the notice addressed to Mr HG Barnby (or receiving an envelope so addressed) would be to think that the notice or the envelope and its contents were meant for Mr Barnby. The notice cannot be construed as a notice given to Mr Fry."

24. In my judgment, the same applies in the present case. There is also the additional factor that if the reasonable recipient had looked at the lease on receipt of the notice, he might have formed the view, as Linney's own solicitors did, that Capita was the right person on whom to serve the notice. In the light of the unambiguous wording of the notice and of the covering letter sent to James Lang LaSalle, I cannot conclude that the reasonable recipient of the letter and the notice would have understood that it was meant to be addressed to Standard Life.
25. Mr. Seitler said that if I decided against Linney the result would be unfair, but as Mr. Warwick pointed out, conditions for the exercise of an option such as a break clause must be strictly complied with, and that has always been the law. In addition, one part of fairness is that contractual stipulations are complied with. The exercise of a break clause has important consequences for both landlord and tenant and there are powerful policy considerations for certainty in this area of the law.
26. For these reasons I conclude that neither of the communications of 23rd July 2008 was effective to determine the lease, and I will grant a declaration to that effect.