Validity of Break Notices in the Wake of Assignment

The recent case of Sackville v Robertson [2018] EWHC 122 (Ch) has questioned the validity of a notice purporting to exercise a break option in a lease. In this case heard in the High Court in January 2018, Sackville (“the Claimants”) were the landlords and Robertson (“the Defendant”) was the former tenant, Integro being the new tenant.

A break clause is a provision in a lease enabling either the landlord or the tenant to terminate the lease early, before the expiry of the contractual term. The commercial lease in issue was granted by the Claimants to the Defendant on 14 March 2013 for a term of 10 years, however contained a break clause enabling the tenant to terminate the lease on the 5th Anniversary (14 March 2018).

Shortly after the grant of the lease, it was duly registered at the Land Registry with title absolute and the Defendant named as the registered proprietor. Thereafter, the Defendant applied for, and was granted, a licence to assign the lease to one of his group companies, Integro (the second defendant) and subsequently entered into a deed of assignment on 29 March 2017. The assignment was not however registered at the Land Registry until 7 July 2017.

On 2 May 2017, Integro’s solicitors sent the Claimants a formal notice purporting to exercise the break option. The covering letter stated that Integro were the tenants under the lease.

The Claimants argued that Integro had no right to issue the break notice and that this should have been served by the Defendant. By virtue of section 27(1) of the Land Registration Act 2002, a disposition of a registered estate does not operate at law until it is completed by registration, e.g. whilst Integro was the equitable assignee, title to the lease was vested in the Defendant pending Integro’s registration (which did not occur until 7 July 2017). The Defendant sought to argue that, by virtue of the Landlord and Tenant (Covenants) Act 1995, Integro was entitled to exercise the break option; however Mr Justice Fancourt disagreed. Mr Justice Fancourt stated that the Claimants obligation under clause 6.10 to treat the lease as ending on 14 March 2018 depended on “the Tenant” giving appropriate notice, so the relevant question was whether “the Tenant” includes a person who is an equitable assignee. Mr Justice Fancourt concluded that the notice should have been served by the Defendant, rather than Integro; it was therefore invalid and the break clause was inoperative. As a result, the lease was unable to terminate early and Integro were bound to the terms of the lease (including payment of rent) until the expiry of the contractual term in 2023.

It took Integro more than three and a half months to register the assignment of the lease with the Land Registry. Had completion of registration taken place prior to the break notice being served on the Claimants, Integro would have had the benefit of the break clause.

In order to avoid serving an ineffective break notice, it is recommended that you seek the advice of a solicitor well in advance of the relevant break date. This case demonstrates how easily a break notice can be incorrectly served and the courts’ strict approach in considering whether a break option has been validly exercised.

If you are a landlord or tenant entering into a lease with a break option, it is recommended that you obtain the advice of a solicitor before the lease is granted. Your solicitor will advise you as to whether the break option can be easily exercised and the steps that you will need to take in advance of the break date.

If you need advice in relation to the grant of a new or renewal lease, whether it includes a break option or not, please do not hesitate to contact our Commercial Property Department on 01702 338338.