Break for litigious leaseholders

A recent House of Lords majority ruling, on whether the tenant of commercial property in central London validly terminated its tenancy early by use of a break clause, has removed some of the rigidity of the interpretation of such clauses.

The tenant, Mannai Investment Co, took out a 10-year lease beginning on 13 January 1992 on premises in Jermyn Street. It included a term entitling Mannai to get out after three years provided it gave six months' written notice to the landlord, Eagle Star Life Assurance Co. This notice would expire on the third anniversary of commencement of the term of the lease.

By error, the notice given by Mannai stated 12 January as the expiry date. On that basis, Eagle Star claimed it was invalid and that Mannai was not entitled to break the lease in the way it wished.

In the High Court, Deputy Judge Rich QC ruled that the landlord was wrong and that Mannai's notice to quit was valid because the last moment of 12 January was also the first moment of 13 January. The Court of Appeal unanimously reversed that decision.

Now, by a three-to-two majority verdict, the Law Lords have ruled that the notice given by Mannai was valid. Lords Steyn, Hoffman and Clyde ruled in favour of Mannai, while Lords Goff and Jauncey ruled that in their opinion the day's difference rendered the notice invalid.

Leading property lawyer Jennifer Rickard, who is a partner in Nabarro Nathanson's property litigation department, and who acted for Mannai, says the ruling is a signpost decision for property law.

"It could have considerable bearing in commercial property when arguments arise over mistakes such as this," she says.

But she warns : "It could also prove a charter for litigation. It is a decision which opens up room for argument on both sides when disputes such as this occur."

During the legal argument, Nicholas Patten QC for Eagle Star warned that a decision such as the one reached would mark a departure from established rules and could cause uncertainty in the construction of notice to quit.

Despite this, the Lords ruled that although there had been an error in the date, Eagle Star must have known what Mannai intended.

Lord Clyde summed up the view of the majority of the Lords by saying that no reasonable landlord would be misled by the use of a date which was inaccurate in the context of a transaction where the intentions were clear and the landlord knew the lease terms. He said the landlord would read the reference to the wrong date as a reference to the correct date, which was one day later.

Rickard says that the decision is one which removes some of the rigidity that has in the past been taken to surround such notice.

She says that future cases, where the timing of notice is called into issue, will depend on the circumstances of the case. However, the decision increases the scope for argument and means that courts will not have to stick rigidly to timing.

They will now be able to apply the test of what a reasonable recipient of such notice would take it to mean. As in this case, it will be open for courts to decide that, despite an error, a landlord should have understood the intention behind the notice and should not therefore have it declared invalid.