Friends Life Ltd v Siemens Hearing Instruments Ltd

The issue on this appeal is this. A lease contained a tenant’s break clause. The break clause said that any notice given by the tenant exercising the right to break “must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954”. The notice that the tenant gave did not contain those words, although it complied with the clause in all other respects. Was the notice valid?

The judge (Mr Nicholas Strauss QC) held that it was. His judgment is at [2013] EWHC B15 (Ch). The landlords, represented by Mr Mark Wonnacott QC, appeal against that decision. The tenants, represented by Mr Timothy Fancourt QC and Mr Tom Weekes, seek to uphold the judge’s decision. For the reasons which follow I would allow the appeal.

In a foreword to Warwick and Trompeter on Break Clauses I wrote:

“If the tenant tries to exercise the break, the chances are that he does so because the market has changed. He is paying more than the rental value of the leased property and wants cheaper accommodation elsewhere. The consequence of failure will be expensive. But the change in economic conditions will be precisely the reason why the landlord will fiercely resist the tenant’s attempt to break the lease. He will pick over the tenant’s notice exercising the break looking for any possible error; and he will examine minutely whether the tenant has fulfilled any conditions on which the validity of the break notice depends. Does it specify the right date? Was it served by the right person? Was it given to the right person? Was it given in accordance with any stipulated timetable? Did the tenant comply sufficiently with his obligations under the lease? Has the tenant given vacant possession? If any one of these questions elicits even a plausible negative answer the stage is set for a full scale battle.”

This case exemplifies that approach. But the question in our case is slightly different: was the notice in the right form?

The lease was granted on 27 January 1999 pursuant to an agreement for a lease dated 14 August 1997. The term was 25 years from and including 24 August 1998. Clause 19 of the lease contained a break clause in the following terms:

“19.1

In this clause the Termination Date means 23 August 2013.

19.2

Subject to the pre-conditions in clause 19.3 being satisfied on the Termination Date, and subject to clause 19.4 the Tenant may determine the Term on the Termination Date by giving the Landlord not more than 12 month's and not less than six month's written notice, which notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954. The term will then determine on the Termination Date, but without prejudice to any rights of either party against the other for any antecedent breach of its obligations under this Lease.

19.3

The pre-conditions are that:

19.3.1

vacant possession of the whole of the Premises is given to the Landlord; and

19.3.2

all Rent and other sums due under this Lease up to the Termination Date have been paid in full; and

19.3.3

the Tenant has paid to the Landlord on or prior to the Termination Date (in addition to the Rent and other sums due under this Lease) a sum equal to one-half of the annual Rent payable by the Tenant under this Lease as at the date of service of the Tenant's notice pursuant to clause 19.2

19.4

The Landlord may waive any of the pre-conditions set out in clause 19.3 at any time before the Termination Date by written notice to the Tenant.

19.5

The Tenant will cancel any registration it has made in connection with this clause within 5 Working Days of the Termination Date.

19.6

Time will be of the essence for the purposes of this clause…”

On about 28 September 2012 the tenant’s solicitors wrote to the landlords in the following terms:

“Site 1, Vector 2, Manor Royal, Crawley (the "Premises")

We act for Siemens Hearing Instruments Limited (Company No.00203774) (the "Tenant") whose registered office is Alexandria House, Newton Road, Manor Royal, Crawley, West Sussex, RH10 9TT.

We write regarding the lease of the Premises between Sun Life Assurance Plc and A&M Hearing Limited, dated 17 January 1999 (the "Lease").

We, Manches LLP, Solicitors and Agents for the Tenant, of 9400 Garsington Road, Oxford Business Park, Oxford, OX4 2HN, HEREBY GIVE YOU NOTICE, for and on behalf of the Tenant, that the Tenant intends to terminate the Lease 23 August 2013 in accordance with clause 19 of the Lease so that the Lease will determine on that date.

We have served this notice on you at your registered office in accordance with clause 17 of the Lease.

.... We should be grateful if you would acknowledge receipt by signing and returning the enclosed duplicate of this letter in the enclosed pre-paid envelope.”

As we can see, the notice did not say that it was given under section 24 (2) of the Landlord and Tenant Act 1954. It did not refer to that Act at all.

The answer to this question lies in the Landlord and Tenant Act 1954, and a debate that was raging at about the time that the agreement for lease was made. Part II of the Landlord and Tenant Act 1954 gives security of tenure to business tenants. Where Part II of the Act applies to a tenancy, it does not come to an end by effluxion of time. Instead it continues under section 24 (1) of the Act unless and until determined in accordance with Part II of the Act. However, section 24 (2) provides:

“The last foregoing subsection shall not prevent the coming to an end of a tenancy by notice to quit given by the tenant, by surrender or forfeiture, or by the forfeiture of a superior tenancy, unless -

(a)

in the case of a notice to quit, the notice was given before the tenant had been in occupation in right of the tenancy for one month; or

(b)

in the case of an instrument or surrender, the instrument was executed before, or was executed in pursuance of an agreement made before, the tenant had been in occupation in right of the tenancy for one month.”

The expression “notice to quit”, which features both in section 26 (4) and section 24 (2) is defined by section 69 of the Act as follows:

“"notice to quit" means a notice to terminate a tenancy (whether a periodical tenancy or a tenancy for a term of years certain) given in accordance with the provisions (whether express or implied) of that tenancy”

The fact that the statutory definition of “notice to quit” includes a notice to terminate a tenancy for a term of years certain means that a break notice is a “notice to quit” as defined: Scholl Mfg Co Ltd v Clifton (Slim-Line) Ltd [1967] 1 Ch 41.

There are two principal statutory methods of termination. The first is by notice given by the landlord under section 25 of the Act. Such a notice must be given not more than twelve nor less than six months before the date of the termination specified in it. However, section 25 (3) provides that in the case of a tenancy which apart from the Act could have been brought to an end by notice to quit given by the landlord:

“… the date of termination specified in a notice under this section shall not be earlier than the date on which apart from this Part of this Act the tenancy could have been brought to an end by notice to quit given by the landlord on the date of the giving of the notice under this section.”

The second principal statutory method of termination is by the tenant making a request for a new tenancy under section 26 of the Act. The latter section provides, so far as material:

“(1)

A tenant's request for a new tenancy may be made where the tenancy under which he holds for the time being (hereinafter referred to as "the current tenancy") is a tenancy granted for a term of years certain exceeding one year, whether or not continued by section twenty-four of this Act, or granted for a term of years certain and thereafter from year to year.

(2)

A tenant's request for a new tenancy shall be for a tenancy beginning with such date, not more than twelve nor less than six months after the making of the request, as may be specified therein:

Provided that the said date shall not be earlier than the date on which apart from this Act the current tenancy would come to an end by effluxion of time or could be brought to an end by notice to quit given by the tenant.

(3)

A tenant's request for a new tenancy shall not have effect unless it is made by notice in the prescribed form given to the landlord and sets out the tenant's proposals as to the property to be comprised in the new tenancy (being either the whole or part of the property comprised in the current tenancy), as to the rent to be payable under the new tenancy and as to the other terms of the new tenancy.

(4)

A tenant's request for a new tenancy shall not be made if the landlord has already given notice under the last foregoing section to terminate the current tenancy, or if the tenant has already given notice to quit or notice under the next following section; and no such notice shall be given by the landlord or the tenant after the making by the tenant of a request for a new tenancy.

(5)

Where the tenant makes a request or a new tenancy in accordance with the foregoing provisions of this section, the current tenancy shall, subject to the provisions of subsection (2) of section thirty-six of this Act and the provisions of Part IV of this Act as to the interim continuation of tenancies, terminate immediately before the date specified in the request for the beginning of the new tenancy.”

At the date of the lease the prescribed form referred to in section 26 (3) was that prescribed by the Landlord and Tenant Act 1954 Part II (Notices) (Regulations) 1983.

The Scholl case also decided that where a lease contained a landlord’s break clause, the landlord did not have to serve a contractual notice, because the statutory methods of termination were in substitution for, and not in addition to, the contractual methods. It was thus sufficient if the landlord served a section 25 notice that complied with the timing requirements in section 25 (3). As Diplock LJ explained at 50:

“To bring to an end a tenancy which by its terms is terminable on notice to quit given by the landlord to the tenant there is no need for the landlord under the Act to serve notice in accordance with those terms. The terms contained in the lease or tenancy agreement relating to its termination are relevant for two purposes only: First and always, to determine what date may be specified in the prescribed notice as the date on which the tenancy may come to an end and, secondly and sometimes, to determine at what date the notice must be given in order that it may be effective. Where the tenancy is for a term of years certain, the date to be specified in the prescribed notice on which it is to come to an end must not be earlier than the date on which, but for the Act, it would come to an end by effluxion of time - see section 25 (4) - and, in the case of notice by the tenant, it must be not [other] than that date. In the case of a tenancy terminable by notice to quit, the date specified in the prescribed notice must be not earlier than that on which the tenancy could, apart from the Act, be brought to an end by notice given by the landlord - see section 25 (3) (a) - and it may by paragraph (b) of the subsection have to be served earlier than it otherwise would.”

I have placed the word “other” in brackets because, unless it is a misprint for “earlier,” it appears to me to be wrong. What is clear, however, is that Diplock LJ applied the same reasoning both to landlords’ notices and to tenants’ requests. The decision that a contractual notice need not be served, but that a statutory notice or request could be served instead of a contractual notice led to a fear that if a lease contained a tenant’s break clause the tenant could terminate the lease on (or possibly after) the break date by making a request for a new tenancy. In a falling market that would have the effect that the tenant could, by that means, engineer a downwards rent review. There was a respectable body of professional opinion that took that view, and draftsmen devoted much ingenuity in attempting to find a way round the perceived problem.

It is that perceived problem that explains why clause 19.2 took the form that it did. The draftsman wished to avoid the tenant making a request for a new tenancy under section 26 rather than serving a contractual break notice. Accordingly he provided that the notice “must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954”. The reasoning runs thus. Section 24 (2) preserves the tenant’s ability to terminate a lease by notice to quit. Notice to quit includes a break notice. If notice to quit has already been served, then section 26 (4) precludes the tenant from making a request for a new tenancy. Accordingly, by ensuring that the tenant gives notice to quit as contemplated by section 24 (2), the problem of the downwards rent review is avoided.

The point was not in fact tested until March 1996 when Rattee J decided Garston v Scottish Widows Fund and Life Assurance Society [1996] 1 WLR 834. He held that where a lease for a fixed term also contained a tenant’s break clause, the tenant was not entitled to make a request for a new tenancy under section 26 if the date of termination was earlier than the date on which the lease would have expired by effluxion of time at common law. Rattee J’s decision on this point was approved by this court in the subsequent appeal some two years later: [1998] 1 WLR 1583.

The agreement for lease in our case was made in August 1997. Although that was after Rattee J’s decision, it was before the decision of the Court of Appeal. The draftsman could not have known which way the appeal would go, and thus assumed the worst. Moreover, as Mr Wonnacott pointed out, the observations of the Court of Appeal on the point were, strictly speaking, obiter. But as the law now stands the perceived problem turned out not to be a problem after all.

However, as Mr Fancourt pointed out, the draftsman made a technical error in the drafting of clause 19.2. Section 24 (2) does not envisage a notice being given “under” that sub-section. Rather it preserves the ability of the tenant to serve a contractual break notice or common law notice to quit, just as it preserves the landlord’s ability to forfeit the lease for breach of covenant.

In a careful and closely reasoned judgment the judge first considered whether the notice given by the tenant satisfied the requirement that it should have been expressed to have been given under section 24(2) of the Landlord and Tenant Act 1954. He held at [21] that it did not. He then went on to consider whether there was “a strict and inflexible rule relating to options, whereby any non-compliance with its terms is fatal”: see [23].

At [24], having referred to Newbold v The Coal Authority [2013] EWCA Civ 584; [2013] RVR 247 and Cusack v London Borough of Harrow [2013] UKSC 40; [2013] 1 WLR 2022, the judge said:

“The flexible approach indicated by the above is apparent in many cases on statutory or contractual requirements, where the statute or the contract says nothing about the consequences of non-compliance. The traditional distinction is between requirements which are mandatory and those which are merely directory, or permissive, but recent case law demonstrates that there are also some requirements which might be described as hybrids. In such cases, the consequence of the non-compliance may depend on its extent: has there been adequate compliance? Or it may depend on its effect: has it made a difference to the other party?”

He rejected the submission that a different principle applied to options. He summarised his conclusions at [39] as follows (omitting some references to authority):

“From these authorities, it seems to me that the position relating to non-compliant notices is as follows:-

(a)

The principles apply equally to statutory and contractual notices.

(b)

Where the statute or the contract term provides that a non-compliant notice will be invalid or ineffective, that is of course the end of the matter: see for example section 26(3) of the 1954 Act.

(c)

Where it does not, the court must assess the statutory or contractual intention by the usual objective criteria, including the background and purpose of the provision, and the effect if any of non-compliance.

(d)

Where the notice is provided for by a statute or by a professionally drafted contract, and the draftsman has not provided, either way, for the consequence of non-compliance, one may reasonably assume that this is deliberate, and that it has been left to the court to decide; while it may go too far to say that there is a presumption, it is natural to conclude that it was intended that the notice should, at least in some circumstances, but not necessarily in all, survive non-compliance.

(e)

The use of “must”, “shall” etc. is not decisive, as Millett LJ indicated in Petch v Gurney. I do not think Lord Denning MR was going any further in Yates than to say that the provisions of that lease which were so worded were mandatory. The court will look to the substance, not the form.

(f)

What is often decisive in practice is the effect of the non-compliance: see in particular the dictum of Lord Steyn in Soneji cited at para. 28 above. Was the omitted information material which it was essential for the other party to have? Has the non-compliance prejudiced the other party? For this reason, notice provisions may be what I have called hybrids, sometimes "mandatory", sometimes not, depending on the nature and extent of the error, and its effect.

(g)

Although provisions relating to the exercise of an option are usually mandatory, any such rule is the court's servant, not its master, and is not inflexible. I agree with Mr. Fancourt's submission that, whilst non-fulfilment in any respect of the conditions for the exercise of an option (in this case the pre-conditions to be fulfilled by 23rd August next), will be fatal, the same may not be true as to the form of an advance notice of the exercise of the option, which in this case was explicitly required to be timely, but not explicitly required to be in due form, to be effective.”

Applying those principles the judge held the notice was not invalidated by the failure to state that it was given under section 24(2) of the Landlord and Tenant Act, for the following reasons:

“(a)

Clause 19 is part of a well drafted lease, and it does not so provide.

(b)

By contrast, by clause 19.6 time is of the essence for the whole clause, including for the service of the notice, and the terms of clause 19.2 and 19.3 make it clear that the lease will not terminate without fulfilment of the pre-conditions for the exercise of the option: only the consequence of a non-compliant form of notice is not specified.

(c)

The failure to use the required wording made no difference at all. All that mattered was that there was no simultaneous request for a new tenancy in the form prescribed by section 26(3). Once notice to quit had been served, section 26(4) precluded any later such request.

(d)

I therefore do not think that the incantation of the magic words was an indispensable condition; it was not something which gave the defendant necessary or even relevant information.

(e)

Although everything else in the option process, in particular the timeliness of the notice and the fulfilment of the preconditions, is almost certainly mandatory (I will not formally decide this in case an issue arises later) it would not be a sensible construction of clause 19 to hold that the use of the required words is mandatory in the circumstances. So to hold would be to adhere slavishly to a supposed rule of construction that makes everything about the process of exercising an option mandatory. As Mr Fancourt submitted, one cannot realistically attribute to the parties an intention to make the tenant's exercise of an important right dependent on compliance with a meaningless formula.”

In its classic form an option is a unilateral (or “if”) contract. The promisor agrees to do something (typically to sell something) if the promisee does or refrains from doing something. The promisee himself does not make any promise: it is up to him whether he does or refrains from doing whatever it is that triggers the promisor’s obligation. That is why it is called an option. As Diplock LJ explained in United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 WLR 74, 83 this has two consequences:

“The first is that there is no room for any inquiry as to whether any act done by the promisee in purported performance of a unilateral contract amounts to a breach of warranty or a breach of condition on his part, for he is under no obligation to do or to refrain from doing any act at all. The second is that as respects the promisor, the initial inquiry is whether the event, which under the unilateral contract gives rise to obligations on the part of the promisor, has occurred. To that inquiry the answer can only be a simple “Yes” or “No.” The event must be identified by its description in the unilateral contract; but if what has occurred does not comply with that description, there is an end of the matter. It is not for the court to ascribe any different consequences to non-compliance with one part of the description of the event than to any other part if the parties by their contract have not done so. See the cases about options: Weston v Collins; Hare v Nicoll.

For the inquiry here is: “What have the parties agreed to do?” — not “What are the consequences of their having failed to do what they have agreed to do?” as it was in the Hongkong Fir case. Such an inquiry cannot arise under a unilateral contract unless and until the event giving rise to the promisor's obligations has occurred.”

Lord Diplock referred to this analysis (although he refrained from repeating it) in United Scientific Holdings Ltd v Burnley BC [1978] AC 904, 929. He also referred to Lord Denning MR’s judgment in the United Dominions Trust case in which Lord Denning had said:

“In point of legal analysis, the grant of an option in such cases, is an irrevocable offer (being supported by consideration so that it cannot be revoked). In order to be turned into a binding contract, the offer must be accepted in exact compliance with its terms. The acceptance must correspond with the offer.”

Lord Diplock added:

“Exact compliance with the terms of the offer in an "if contract" had been required in courts of equity as well as in courts of common law…. A rationale of the distinction which was drawn between the two kinds of contracts in courts of equity is that equity was concerned with the performance of contracts into which parties had already entered. It did not force any person to enter into a contract with another.”

It is for these reasons that where an option prescribes substantive conditions that must be fulfilled by the promisee before the promisor’s obligations are triggered, those conditions must be completely fulfilled. Substantial fulfilment is not enough. Thus an option to renew, conditional on performance of the tenant’s covenants, cannot be exercised:

It is true that an option to terminate a lease is not quite the same as an option to renew a lease, because the parties are not being brought into any new contractual relationship. Mr Fancourt submitted that this distinction should lead the court to be more cautious about concluding that a stipulation in a break clause was a mandatory requirement of the clause. However, I do not believe that it has ever been doubted that the principles applicable to compliance with conditions upon which an option to renew depends apply equally to compliance with conditions upon which a break clause depends. This is clear from United Scientific at 929 E-G (Lord Diplock); 945 H (Lord Simon); 951 A-C (Lord Salmon); 962 (Lord Fraser); Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 949 at 753-4 (Lord Goff); 762 C (Lord Jauncey); 776 B (Lord Hoffmann); Dun & Bradstreet Software Services (England) Ltd v Provident Mutual Life Assurance Association [1998] 2 EGLR 175 at 180 B (Peter Gibson LJ) and Fitzroy House Epworth Street (No 1) Ltd v Financial Times Ltd [2006] EWCA Civ 329; [2006] 1 WLR 2207. Indeed one of the earliest English cases to reach the House of Lords on the question whether conditions attached to options had to be strictly performed was itself a case of a break clause: Grey v Friar (1854) 4 HL Cas 565.

That even trivial non-compliance with a condition on which the exercise of a break clause depends will preclude its successful exercise is graphically illustrated by Lord Hoffmann’s vivid observation in Mannai at 776:

“If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.”

This observation has been picked up in subsequent cases: e.g. Newbold v The Coal Authority at [70].

There is one other strand of reasoning that emerges from the cases about options. It is that although any question of interpretation depends on the particular instrument, consistency of approach is important and the court should not reach radically different interpretations of break clauses in commercial leases based on slight differences in language which are not obviously intended to achieve different objectives: see e.g. Burch v Farrows Bank Ltd [1917] 1 Ch 606; Aviva Life and Pensions UK Ltd v Linpac Mouldings Ltd [2010] EWCA Civ 395; [2010] L & TR 10.

The starting point for a consideration of what amounts to a compliant option notice is, I think, the decision of the House of Lords in Mannai. The tenant held under two leases granted for a term of 10 years from and including 13 January 1992. Each of the leases contained a break clause entitling the tenant to terminate the lease on the third anniversary of the term commencement date. That date was 13 January 1995. The tenant in fact gave notice purporting to determine the leases on 12 January 1995. The House of Lords decided (by a majority of three to two) that the notice was valid. The Law Lords in the majority were Lords Steyn, Hoffmann and Clyde. Those in the minority were Lords Goff and Jauncey.

Lord Steyn began his consideration of the validity of the notice at 767 by saying that:

“This is not a case of a contractual right to determine which prescribes as an indispensable condition for its effective exercise that the notice must contain specific information. After providing for the form of the notice (“in writing”), its duration (“not less than six months”) and service (“on the landlord or its solicitors”), the only words in clause 7(13) relevant to the content of the notice are the words “notice to expire on the third anniversary of the term commencement date determine this lease”. Those words do not have any customary meaning in a technical sense. No terms of art are involved. And neither side has suggested that anything should be implied into the language.”

The important point was that in so far as the form and content of the notice were specified by the break clause, the notice given complied with those specifications. I confess that I am puzzled by the phrase “an indispensable condition” in the context of an option. If something is a condition of an option then by definition it is indispensable. Lord Hoffmann said at 774:

“The clause does not require the tenant to use any particular form of words. He must use words which unambiguously convey a particular meaning, namely an intention to terminate the lease on 13 January.”

He therefore considered that the question turned solely on the interpretation of the notice. He contrasted this with formal requirements at 776 in terms part of which I have already quoted:

“… because such notices have unilateral operation, the conditions under which they may be served must be strictly complied with. I have already said that this principle is accepted on both sides. But, as an explanation of the method of construction used in Hankey v Clavering, it begs the question. If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease. But the condition in clause 7(13) related solely to the meaning which the notice had to communicate to the landlord. If compliance had to be judged by applying the ordinary techniques for interpreting communications, there was strict compliance. The notice clearly and unambiguously communicated the required message. To say that compliance must be strict does not explain why some other technique of interpretation is being used or what it is.”

Thus he held that the notice did comply with the requirements of the clause. It was not a case of excusable non-compliance.

Lord Clyde said at 781:

“The substance of the power is expressed by the words "The Tenant may . . . determine this Lease". The method of its exercise is specified by the intervening words. The tenant must give six months' notice; the notice must be in writing; the notice must be served on the landlord or its solicitors. The sub-clause also states that the notice is to expire on the third anniversary of the term commencement date. The significance of that statement is that the period of six months is to terminate on that date. This regulates the time for the giving of the notice. The third anniversary marks the end of the period prior to which a notice under clause 7(13) must be given. But it is not required that the notice should include mention of the date of the intended determination of the lease. That date is prescribed by clause 7(13) where it states that the lease shall determine on expiry of the notice.

      Where a notice of termination complies precisely and unambiguously with the provision which empowers the sending of the notice then its validity should be unquestioned. Where the terms of the notice do not altogether accord with the provisions of the contract that may or may not render the notice unenforceable. The problem then may come to be one of finding a fair and reasonable construction of the notice. But there can be cases where the validity of the notice cannot be saved by any construction and will have to be regarded as bad.”

Thus all the Law Lords in the majority held that on the true interpretation of the lease, the notices in fact complied with the requirements about their form and content. The majority speeches in that case give no support to the notion that there is a species of permitted non-compliance with the formal requirements of a clause prescribing the method of exercise of an option.

The minority were even more emphatic. Lord Goff said at 753:

“You start with the position that, under the lease, the tenant has covenanted to pay rent for the full term; but under a proviso in the lease the tenant may, by notice, rid himself of the obligation under that covenant. However, to be effective for that purpose, the notice must conform to the terms of the proviso. If on its true construction the notice does not do so, it will not be effective for its purpose, because the parties have agreed that only a notice conforming to the terms of the proviso will be effective. The fact that the landlord realises that the tenant intended to take advantage of his rights under the proviso, but has only failed through some mistake to give the required notice, is irrelevant. The simple fact is that the tenant has failed to use the right key which alone is capable of turning the lock.”

Lord Jauncey said at 762:

“Notices terminating a tenancy are technical documents because they are effective without the consent of the receiver. It is therefore essential that they conform to the statutory or contractual provisions under which they are given.”

Some of the cases have considered whether, as a matter of interpretation of the clause in question, words in the clause contained a requirement about the form, content, or manner of communication of an option notice. There were three cases on which Mr Fancourt particularly relied.

The first was Yates Building Company Ltd v RJ Pulleyn (York) Ltd [1976] 1 EGLR 157. That case concerned an option to buy land. The option clause provided:

“The option hereby granted shall be exercisable by notice in writing given by or on behalf of Yates to Pulleyns or to Pulleyns' solicitors at any time between April 6 1973 and May 6 1973 such notice to be sent by registered or recorded delivery post to the registered office of Pulleyns or the offices of their said solicitors.”

Notice was given in time, but it was sent by ordinary post rather than by registered or recorded delivery post. This court held that the notice was nevertheless valid. The critical words to be construed were “to be sent by registered or recorded delivery post”. The question was, as Mr Wonnacott submitted, whether those words were indicative or imperative. Lord Denning MR said:

“The option is an offer: an irrevocable offer. When a person makes an offer, he does sometimes prescribe the method by which it is to be accepted. If he prescribes it in terms which are mandatory or obligatory, the acceptance is only good if it complies with the stated requirements. Thus in the present case the notice of acceptance must be in writing, and must be given to Pulleyns or to Pulleyns’ solicitors, and must be given between April 6 1973 and May 6 1973. But the question is whether the words “such notice to be sent by registered or recorded delivery post” are mandatory or directory. That test is used by lawyers in the construction of statutory instruments, but it can also be used in the construction of other documents. The distinction is this: a mandatory provision must be fulfilled exactly according to the letter, whereas a directory provision is satisfied if it is in substance according to the general intent.”

Although the option clause itself did not use the word “must”, that is how Lord Denning interpreted the word “shall”. He also necessarily held that the word “shall”, which appeared towards the beginning of the clause, only governed it as far as the second of the two dates mentioned in the clause. Lord Denning held that applying the principles he had formulated the notice was valid. In so deciding he also applied the principle stated by Buckley J in Manchester Diocesan Council of Education v Commercial & General Investments [1970] 1 WLR 241:

“Where, however, the offeror has prescribed a particular method of acceptance, but not in terms insisting that only acceptance in that mode shall be binding, I am of opinion that acceptance communicated to the offeror by any other mode which is no less advantageous to him will conclude the contract.”

But Lord Denning added that:

“If the offeror uses terms insisting that only acceptance in a particular mode is binding, it is mandatory. If he does not insist, and it is sufficient if he adopts a mode which is no less advantageous, it is directory.”

Orr LJ agreed. Scarman LJ also agreed but doubted whether the distinction between mandatory and directory provisions was a useful one. Contractual provisions were, in his view “either obligatory or permissive”. In my judgment this case decided that the method of posting the option notice was not a requirement of the clause. It was merely permissive. I do not consider that it supports the proposition that an option notice may be valid if it fails to comply with a requirement of the clause. Indeed Lord Denning’s repeated emphasis on the word “must,” and his statement that if the clause insists that only acceptance in one mode is binding that is a mandatory requirement, strongly point to the contrary conclusion.

The second case (referred to in Mr Fancourt’s skeleton argument but not in oral argument) was the decision of this court in Dun & Bradstreet. The relevant question in that case was whether the break clause required the payment of a penalty rent by the break date. The clause provided:

“The tenant may by not less than nine months written notice served upon the Landlord expiring on the 24th June 1995 (time being of the essence) determine this demise on the 24th June 1995 upon condition that the Tenant shall thereupon (or on the earlier vacation of the property) pay to the Landlord (in addition to all other payments which may be due and payable to the Landlord under the terms hereof upon the expiration or sooner determination of this Lease or otherwise) a sum equal to six months rent at the rate payable hereunder in respect of the period of six months immediately preceding the expiration of the said period of ten years.”

The court pointed out that although time was expressly stated to be of the essence of the time for serving the notice, it was not so stated in relation to the date for payment of the penalty rent. The argument turned on the import of the phrase “upon condition that”. Not surprisingly, the court held that those words strongly indicated that the provision they introduced was of the essence of the contract. Consequently the tenant’s failure to pay the penalty rent on time invalidated the exercise of the break clause. That case is entirely in line with the orthodox position that any failure to comply with a requirement of the option clause will invalidate its exercise.

The third case was the decision of this court in Rennie v Westbury Homes (Holdings) Ltd [2007] EWCA Civ 1401. That case concerned an option to buy land under which the option period was capable of extension. The clause dealing with extending the period provided:

“At any time during the last year of the Option Period (meaning the period of 10 years referred to in clause 1.1.9) the intending Purchaser may by notice in writing served upon the intending Vendor require such period to be extended by 5 years and upon service of such notice and payment to the intending Vendor of the additional sum of TWENTY THOUSAND POUNDS (£20,000) this Agreement shall be construed as if the Option Period was 15 years.”

The last year of the original option period expired on 16 September 2002. On 12 September 2002 the grantee’s solicitors wrote to the grantor’s solicitors saying that they would shortly be put in funds “for the extension of the option for a further five years” and asked for details of the bank account to which a transfer should be made. The grantee did not reply. On 17 September the grantee’s solicitors obtained the bank details from the grantor’s solicitors and the money was transferred in the afternoon of that day. The argument for the grantor was that the notice had explicitly to require that the option period be extended for a further five years. Dyson LJ summarised it as follows:

“I accept the submission of Mr Reynolds QC, that it is implicit in this formulation [i.e. that of Lord Steyn in Mannai] that, where the case is one where it is an indispensable condition that the notice should contain “specific information”, the omission of that information invalidates the notice. Mr Reynolds submits that clause 9.1, in describing a notice thereunder as being one “requir[ing] such a period to be extended”, was making it an indispensable condition that the notice should contain this specific information that that was what the defendant required. The notice of 12 September contained no words which “required” the Option Period to be extended.”

Dyson LJ rejected that argument. His first reason was to approve explicitly the reasoning of the trial judge (Henderson J) who had said:

“But the provision that Westbury should by the notice ‘require [the option] period to be extended by 5 years’ is a stipulation of a different nature. It simply describes what it is that the notice must convey to the recipient, without prescribing any particular form of words or any particular details that must be included. There is nothing in the nature of a condition precedent to valid exercise of the right, but rather a statement of the meaning which the notice must communicate to the intending Vendor. Such statements fall squarely within the ambit of the Mannai test, and the question is simply how they would have been understood by a reasonable recipient.”

Dyson LJ continued:

“[15] … In my view, Lord Steyn's first proposition cannot sensibly be pressed into service, as contended by Mr Reynolds. A typical case of an “indispensable condition” is where the contract states that the relevant notice shall be in writing and shall contain particular information. Some clauses may expressly say that “the notice shall only be valid if …”. Where express language of this kind does not appear in the clause, it will be a question of construction whether it is an indispensable condition for validity that the notice satisfies the requirements of the clause. I accept the submission of Mr Male that it would be formalism in the extreme if the notice in the present case were to be held to be invalid because it failed to say in terms “I require such a period to be extended”, if the notice clearly conveyed to the recipient that the defendant was seeking to exercise its right under clause 9.1 to require the period to be extended.

[16] To put the point another way, it is not a condition precedent to the proper exercise of the right conferred by clause 9.1 that the defendant should state in terms that it requires the Option Period to be extended. Clause 9.1 does not so provide expressly or by necessary implication. It is sufficient, if the defendant makes it clear to a reasonable recipient, that it is exercising the right conferred by the clause.”

Latham and Jacob LJJ agreed. Thus the decision was that it was not a condition precedent to the exercise of the option that the notice had to state in terms that the grantee required the option period to be extended. If it had been then the decision would, in my judgment, have gone the other way. To put the point another way, the court decided that the notice in that case did comply with the formal requirements of the option clause. I do not regard this case as supporting the notion of a species of permitted non-compliance with the formal requirements of clause prescribing the method of exercise of an option. I observe also that it was not argued (as it might have been in the light of Dun & Bradstreet) that failure to pay the money on time was itself sufficient to invalidate the exercise of the option to extend.

It is true that in some cases about notices given under statute the courts have held that minor non-compliance with formal requirements did not invalidate notices. The judge referred to a number of such cases. It is also true that in Newbold v The Coal Authority Sir Stanley Burnton said at [70]:

“In all cases, one must first construe the statutory or contractual requirement in question. It may require strict compliance with a requirement as a condition of its validity. In Mannai at 776B Lord Hoffman gave the example of the lease requiring notice to be given on blue paper: a notice given on pink paper would be ineffective. Against that, on its true construction a statutory requirement may be satisfied by what is referred to as adequate compliance. Finally, it may be that even non-compliance with a requirement is not fatal. In all such cases, it is necessary to consider the words of the statute or contract, in the light of its subject matter, the background, the purpose of the requirement, if that is known or determined, and the actual or possible effect of non-compliance on the parties. We assume that Parliament in the case of legislation, and the parties in the case of a contractual requirement, would have intended a sensible, and in the case of a contract, commercial result.”

But I do not consider that these observations were intended to detract from the well-established principle that in the case of a unilateral (or “if”) contract such as an option, the terms of exercise must be fully complied with, for the reasons given by Diplock LJ and Lord Diplock respectively. Notices given under statutes and some kinds of notices given under contracts (e.g. rent review notices) even if labelled “options” do not fall into that special class of case. If the judge’s approach were correct I do not see how it could be restricted to compliance with conditions about the form of notices. It would surely also apply to trivial failures to comply with other conditions (e.g. a notice served a few minutes late or trivial breaches of repairing obligations). In all such cases the court would be invited to answer the question: did the parties really mean that such trivial non-compliance would defeat a valuable right? But in the case of a unilateral (or “if”) contract that has never been a relevant question.

I cannot therefore accept the judge’s conclusion that if (as he held) the notice did not comply with the requirements of clause 19.2 it was nevertheless a valid notice.

Clause 19.2 said that the notice:

“…must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954.”

I agree with Mr Wonnacott that the word “must” is an emphatic and imperative word. It is impossible in my judgment to interpret the clause as if it said that the notice “must” be expressed in a certain way, but it does not matter if it is not.

Mr Fancourt relied (as did the judge) on the decision of this court in Petch v Gurney [1994] 3 All ER 731. The case concerned a tax appeal by way of case stated from the Special Commissioners. The statute under consideration required the case stated to be transmitted to the High Court within 30 days of its receipt. The taxpayer was late in transmitting his case stated to the court. Millett LJ said:

“The question whether strict compliance with a statutory requirement is necessary has arisen again and again in the cases. The question is not whether the requirement should be complied with; of course it should: the question is what consequences should attend a failure to comply. The difficulty arises from the common practice of the legislature of stating that something “shall” be done (which means that it “must” be done) without stating what are to be the consequences if it is not done. The Court has dealt with the problem by devising a distinction between those requirements which are said to be “mandatory” (or “imperative” or “obligatory”) and those which are said to be merely “directory” (a curious use of the word which in this context is taken as equivalent to “permissive”). Where the requirement is mandatory, it must be strictly complied with; failure to comply invalidates everything that follows. Where it is merely directory, it should still be complied with, and there may be sanctions for disobedience; but failure to comply does not invalidate what follows.”

Applying those principles the court held that the time limit was mandatory. Again this dealt with a statutory time limit, rather than the method of exercise of an option. But it is important to understand what the question was. The question was not whether the requirement had been complied with. It had not. The question for the court was: what were the consequences of failing to comply with that time limit? But in the case of an option, the answer would be clear. The common law supplies the answer. Failure to exercise the option in time means that it has not been validly exercised. As Diplock LJ explained in United Dominions Trust it is not for the court to ascribe any different consequences to non-compliance with one part of the description of the event than to any other part if the parties by their contract have not done so. Again I do not consider that the judge sufficiently appreciated the special nature of a unilateral (or “if”) contract. It is also worthy of note that Millett LJ said that in the context of the statutory requirement the use of the word “directory” was equivalent to “permissive”, which echoes what Scarman LJ had said in Yates. I do not consider that in our case a requirement that the notice “must” be expressed in a particular way can be relegated to a permissive provision.

Accordingly I consider that the judge was wrong in holding that the fact that the parties did not explicitly prescribe the consequences of a failure to comply with the formal requirements of clause 19.2 meant that the court could do so.

That leads to the last question: did the notice comply?

Mr Fancourt disclaimed any challenge to the judge’s conclusion at [21] that the notice did not comply with the requirements of the clause. In one sense that is the end of the appeal. If the notice did not comply with the requirements of the clause, then the break was not successfully exercised. But Mr Fancourt’s argument was that there was sufficient compliance if the notice achieved the purpose underlying the requirement. The notice in our case was compliant with the substantive provisions of section 24 (2), namely that: (a) it was a notice to quit (which as defined includes a break clause) (b) it was being given by the tenant and (c) the tenant was giving it at common law and not in the exercise of any right created by the Act. If the tenant had wished to invoke the right to claim a new tenancy (which was the mischief against which this part of clause 19.2 was directed) it would have had to have served a request for a new tenancy in the form prescribed by the Regulations. But it did not. Those were the purposes underlying the clause and satisfaction of those purposes ought to be enough.

Attractively as that argument was advanced I cannot accept it. I accept, of course, that the purpose underlying a contractual provision may be highly relevant to what it means. But Mr Fancourt accepted that what the clause meant was that the notice had to say that it was being given under section 24 (2) of the Landlord and Tenant Act 1954. He did not contend that clause 19.2 should be interpreted in such a way that it meant no more than that the notice should satisfy the substantive provisions of section 24 (2). But compliance with the substantive provisions of section 24 (2) is not the same as complying with the formal requirements of clause 19.2. Moreover as Mr Wonnacott submitted since clause 19.2 required that the notice be “expressed” to be given under section 24 (2) it would not be enough to conclude that it conveyed that message implicitly. Here there was no compliance with the formal requirement of clause 19.2 that the notice be “expressed” in a particular way. There was quite simply no reference in the notice to section 24 (2) at all.

I do not accept that in the field of unilateral (or “if” contracts) there is any room for the notion of substantial compliance. As Diplock LJ said in United Dominions Trust the question is whether the relevant event has occurred. That question is to be answered “Yes” or “No”. It cannot be answered “Almost”. Either a purported exercise of an option satisfies both the formal and substantive provisions of the clause, or it does not. If it does not, then it is ineffective. In my judgment ours is such a case. I appreciate that that is a harsh result, but hard cases make bad law.

For these reasons I would allow the appeal. The clear moral is: if you want to avoid expensive litigation, and the possible loss of a valuable right to break, you must pay close attention to all the requirements of the clause, including the formal requirements, and follow them precisely.

I agree that the appeal should be allowed for the reasons given by Lewison LJ.

I also agree.