Negotiating the service of notice minefield in commercial leases

In a nutshell

What’s it all about? Getting things right when it comes to the service of notice in commercial leases, for both landlords and tenants.
Why should you care? If you dont pay attention to lease clauses covering notices, it could cost you dearly in the long run. For example, if a landlord makes a mistake in the content of a notice to quit, a tenant may be entitled to stay on in occupation. Conversely, if a tenant makes a mistake when serving notice to terminate a lease, the tenant may be obliged to keep paying rent for a further year.
What do you need to do now? Make sure that all notices are served on time and exactly in accordance with the relevant provisions in the lease.
Get in touch: If you would like to speak to someone on serving notice on commercial leases, or any other matter contact Chris Noble on 0131 247 2558

Contract Signing

The full story

On the face of it, given everything else that might transpire during the term of a commercial lease, you may think that clauses dealing with the service of notices should be among the least controversial. However, this area has proved something of a minefield in recent years.

It is often the case that during a lease negotiation more attention is given to some of the other key provisions than the clauses covering notices, but there are now numerous examples of both landlords and tenants being caught out in this regard - with expensive consequences.

With the market trend in recent years towards shorter guaranteed terms for commercial leases, break options are increasingly common on a mutual or tenant only basis.

Advance warning

Both landlords and tenants would be well advised to allow themselves plenty of time in advance of a break date to review the relevant clauses and identify any issues up front. Making assumptions at this point could prove costly.

Parties must ensure they have complied with any conditions (whether or not these are contained in the "notices" clause - a review of the whole lease should be undertaken), and that a valid notice can be timeously drafted and served in order to avoid any nasty surprises.

From a landlord’s perspective, if a break clause is not drawn in sufficiently clear and precise terms, it may be construed in such a way as to render any poorly drafted pre conditions unenforceable on a tenant, allowing them to exit their lease without having to comply with such provisions.

And on the tenant’s side, there is rarely, if ever, any obligation on a landlord to acknowledge receipt of (and thereby validate) a break or termination notice, which means if a fatal error has been made, the tenant is unlikely to find out until it's too late.

What do the courts say?

The approach of the courts has been inconsistent. While in certain instances we have seen a move towards a more commercial interpretation of such clauses, in other decisions a more literal approach has led to situations where the parties have paid a heavy price on a technicality.

Parties to a lease should assume that the principle of strict compliance will apply to ensure that a break option is exercisable. In the 2014 case of Arlington Business Parks v Scottish & Newcastle, S&N were caught out by wording in their lease which provided that a break notice was invalid if the tenant was in breach of any of their obligations at the date of service of the notice and/or the termination date. Despite spending over £1m on repairs after serving notice to break, the fact they were in breach as at the date of the notice was held to have invalidated the break option.

Conversely, in the 2013 case of Res Re II A LLP v CBS Outdoor Ltd it was discussed that “the ultimate aim in construing a contract is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant”, so for example a tenant will not automatically be in breach of an obligation to give vacant possession upon exercise of a break option if they leave moveable property in the premises, rather only if any such items would substantially prevent or interfere with the enjoyment of the premises.

You’ve been served … or have you?

Perhaps stating the obvious, ensuring that any notice is served on the correct party is also important. As a minimum, a Land Register search and a check of Companies House before drafting could prevent a notice being held invalid. In Ben Cleuch Estates Ltd v Scottish Enterprise, SE had served notice to terminate on a company, which it had wrongly assumed was their landlord, their actual landlord having changed its name. It was held on appeal that any question of reasonableness of interpretation didn’t come into their deliberations, as the notice had quite simply not been served on the actual landlord at all.

Shorter lease terms mean more regular lease expiries, and in that respect we are often asked about the Scots law principle of tacit relocation. It is a fundamental principle of lease law in Scotland that (unlike in England) if neither party serves a valid notice terminating the lease more than 40 clear days prior to the expiry date, the lease will automatically continue for a further year.

More often than not, leases provide that a notice will be deemed validly served 48 hours after posting by recorded delivery. It is perhaps worth mentioning that unless the lease specifically provides notices must only be served in this way, it will still be possible to serve direct by hand, which may be useful where time is tight. However, just to confuse matters further, it was held in Kodak v Shoredale that a pre-irritancy warning Notice had to be sent by the Royal Mail Recorded Delivery service whatever the circumstances, and service by sheriff officers was invalid.

Clarity is key

There are numerous pitfalls in this area, thus when parties are agreeing lease terms, great care must be taken to set out as clearly as possible their intentions around notices.

If you would like to speak to someone on serving notice on commercial leases, or any other matter, get in touch.

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