Peer Freeholds Ltd v Clean Wash International Ltd

This is an appeal from the order of Master Moncaster made on the 13^th October 2004 in which he dismissed the application of Peer Freeholds Limited the claimant in these proceedings (“the landlord”) for summary judgment on the claim against Clean Wash International Limited the defendant (“the tenant”). The Master also struck out the claim form pursuant to Civil Procedure Rule 3.4(2) but gave permission to appeal.

By a lease dated the 8^th November 2001 Nichol Duty Products Limited granted to the tenant a lease of business premises in Thetford for a term of six year less three days. The landlord has acquired the headlease of that underlease. The underlease provided for fixed rent increases on the 23^rd August 2001, 2002 and 2003 up to a figure of £65,000. Thereafter the rent was to be reviewed annually on the 22^nd August of each succeeding year, upwards only, but not to exceed the appropriate open market rent for the premises. Schedule 5 of the underlease contained the provisions as to reviewing rent for the years after the 22^nd August 2004. Paragraph 5 of that schedule contains provisions for an arbitration in the event that the parties could not agree the appropriate market rent.

At paragraph 6.8 of the underlease under the heading “Tenants Break Option” the following provisions appear:-

“If the Tenant shall desire to determine this Lease at the end of the third year of the Term and shall give to the Landlord six months’ previous notice in writing of such desire and if the Tenant shall up to such determination pay the rents hereby reserved THEN immediately on the expiration of such third year this present Lease and everything herein contained shall cease and be void but without prejudice to any of the remedies claims and rights of action of either party against the other in respect of any antecedent claims or breach non observance non performance or non fulfilment of the said covenants stipulations and conditions or any of them.”

By letter dated 5^th January 2004 the tenant wrote to the landlord as follows:-

“Please take this letter as notice that we intend to exercise our break option in the underlease of 1 Brunel Way, Thetford, Norfolk, at the end of the third year of this lease on the 22^nd August 2004.

If you are able to re-let the building before 22^nd August 2004 we would be prepared to discuss the possibility of us vacating early if that suited a prospective tenant.

Please could you acknowledge receipt of this letter within 14 days.”

The landlord’s response to that letter is dated 20^th January 2004 and reads as follows:-

“Peer Freeholds Limited

Paternoster House, Brunel Way, Thetford

Your letter dated 5^th January 2004 was received by me on 6^th January 2004. This acknowledgement does not constitute either confirmation or acceptance of your letter as a valid notice under the provisions of clause 6.8 of the lease and should not be taken as such.”

The tenant’s reply of the 22^nd January 2004 reads:-

“I have your letter of the 20^th January 2004 and should be grateful if you would explain why you are unable to accept my letter of the 5^th January 2004 as notice of our intention to exercise our break clause in the lease for 1 Brunel Way, Thetford.

We are required to give you six months notice prior to the expiry of the third year of the lease and we have given you over seven months notice. …. ”

The landlords responded on the 26^th January :-

“My letter to you dated the 20^th January adopted the standard wording that I use to acknowledge letters purporting to be notices. The onus of serving a valid notice lies with the tenant and if you are in any doubt about the validity of your notice you should seek legal advice.”

On the 20^th February 2004 the tenant’s agent wrote to the landlord:-

“I refer to our telephone conversation with regard to the above unit. To confirm, we are instructed by Mr Bartram of Clean Wash to dispose of the remainder of their lease which is due to finish on the 22^nd August 2004. Clean Wash have mothballed the operation and clearly wish to surrender liability of the lease as soon as possible.”

It will be observed that under the provisions of clause 6.8 of the underlease, in order to operate the break clause, the tenant had to give at least six months notice of his wish to do so expiring “at the end of the third year of the Term” being the 7^th November 2004. It is common ground that clause 6.8 is to be construed in this way and so the tenant would have been in a position to serve a notice to operate the clause at any time up to the 7^th May 2004. However the tenant’s purported notice to exercise the break option contained in their letter of the 5^th January 2004 was mistaken in saying that the break could take effect on 22^nd August 2004. On the 11^th May 2004 the landlords wrote to the tenant:-

“I refer to our telephone discussion on Friday concerning the condition of the premises. I confirm that my company’s buildings surveyor will carry out his inspection and then liase with your surveyor concerning the repairs to the premises generally.

With regard to your letter of the 5^th January 2004 purporting to terminate the lease with effect from the 22^nd August 2004, I am of the opinion that the lease contains no provision permitting you to break the lease at that date. Accordingly the lease will continue until its contractual expiry date. You have made representations to me on two occasions that you have obtained legal advice confirming the validity of your letter as notice to break the lease. The legal advice that I have obtained is contrary to your advice.”

The question, therefore, before the Master was whether the tenant’s letter of the 5^th January 2004 was an effective notice for the purpose of activating clause 6.8 of the underlease notwithstanding that it was expressed to expire on the 22^nd August 2004. The Master concluded that it was.

A number of authorities were cited to the Master but he cited only two in his judgment the decision of the House of Lords in Mannai Investment Company Ltd v Eagle Star Life Assurance Company Ltd 1997 AC 749 and Garston v Scottish Widows Fund 1998 1WLR 1583 a decision of the Court of Appeal. The headnote of the Mannai case reads as follows:-

“By two leases dated 11 March 1992 office premises and a car park were demised by the landlord to the tenant for the term of 10 years from and including 13 January 1992. By a clause in each of the leases it was agreed that the tenant could determine the lease by serving not less than six months’ notice in writing on the landlord or its solicitors to expire “on the third anniversary of the term commencement date.” By letters dated 24 June 1994 the tenant gave notices to the landlord to determine both leases on 12 January 1995. The judge held that on the true construction of the leases and the notices served by the tenant the terms granted by the leases were determined on the last moment of 12 January 1995, being the first moment of 13 January 1995. The Court of Appeal allowed the landlord’s appeal, holding that a notice stated to take effect on 12 January could not operate to determine the lease on 13 January and that the notices served by the tenant were, therefore, ineffective.”

The House of Lords by a majority allowed the appeal holding that the construction of the notices had to be approached objectively, and the question was how a reasonable recipient would have understood them, bearing in mind their context. The leading speech for the majority was given by Lord Steyn. At page 767 of the report he is recorded as saying:-

“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. That is not surprising since the tests governing the implication of terms could not conceivably be satisfied. The language of clause 7(13) must be given its ordinary meaning. A notice simply expressed to determine the lease on the third anniversary of the commencement date would therefore have been effective. The principle is that that is certain which the context renders certain:”

Similarly in the present case the contractual provisions do not require the giver of a notice to give specific information as to the precise date on which he intends his notice to take effect in breaking the lease. Then at page 768 Lord Steyn continues:-

“The real question is what evidence of surrounding circumstances may ultimately be allowed to influence the question of interpretation. That depends on what meanings the language read against the objective contextual scene will let in. Thirdly, the inquiry is objective: the question is what reasonable persons, circumstanced as the actual parties were, would have had in mind. It follows that one cannot ignore that a reasonable recipient of the notices would have had in the forefront of his mind the terms of the leases. Given that the reasonable recipient must be credited with knowledge of the critical date and the terms of clause 7(13) the question is simply how the reasonable recipient would have understood such a notice…There is no justification for placing notices under a break clause in leases in a unique category. Making due allowance for contextual differences, such notices belong to the general class of unilateral notices served under contractual rights reserved,..Even if such notices under contractual rights reserved contain errors they may be valid if they are “sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate:”… The Deltacase at p 454 E-G per Slade LJ… That test postulates that the reasonable recipient is left in no doubt that the right reserved is being exercised. It acknowledges the importance of such notices. The application of that test is principled and cannot cause any injustice to a recipient of the notice. I would gratefully adopt it.That brings me to the application of this test. The facts are simple. Crediting a reasonable recipient with knowledge of the terms of the lease and third anniversary date (13 January), I venture to suggest that it is

obvious that a reasonable recipient would have appreciated that the tenant wished to determine the leases on the third anniversary date of the leases but wrongly described it as the 12th instead of the 13th. The reasonable recipient would not have been perplexed in any way by the minor error in the notices. The notices would have achieved their intended purpose.”

In his speech at page 774 Lord Hoffmann, having described by reference to Mrs Malaprop “the way we interpret utterances in everyday life” continued:-

“If one applies that kind of interpretation to the notice in this case, there will also be no ambiguity. The reasonable recipient will see that in purporting to terminate pursuant to clause 7(13) but naming 12 January 1995 as the day upon which he will do so, the tenant has made a mistake. He will reject as too improbable the possibility that the tenant meant that unless he could terminate on 12 January, he did not want to terminate at all. He will therefore understand the notice to mean that the tenant wants to terminate on the date on which, in accordance with clause 7(13), he may do so, i.e. 13 January.”

Lord Hoffmann continues at page 779:-

“The fact that the words are capable of a literal application is no obstacle to evidence which demonstrates what a reasonable person with knowledge of the background would have understood the parties to mean, even if this compels one to say that they used the wrong words. In this area, we no longer confuse the meaning of words with the question of what meaning the use of the words was intended to convey. Why, therefore, should the rules for the construction of notices be different from those for the construction of contracts? There seems to me no answer to this question.”

Lord Hoffmann carried the principles set out from the excerpts from his speech which I have set out above into his leading speech for the majority in Investors Compensations Scheme Ltd v West Bromwich Building Society & ors 1978 1WLR 896 at page 912.

In the Garston case the Court of Appeal were also dealing with the construction of a break clause in a lease. By clause 7 of the lease the tenants had an option to determine the lease on the expiration of the tenth year of the term by giving the landlord at least six months previous notice in writing. By a letter the tenant purported to give notice to determine the lease and at the same time requested a grant of a new tenancy under section 26 of the Landlord and Tenant Act 1954 for nine years from the 10^th July 1995 at a lower rent than that payable under the lease. The notice seeking determination of the lease erroneously gave the date of determination as the 9^th July 1995 i.e. the tenth anniversary of the lease rather than 24^th June 1995 which was the tenth anniversary of the commencement of the term. The Court of Appeal allowing the appeal held that a notice to determine a lease for a fixed term, mistakenly specifying a determination date not authorised by the lease, was a valid notice if the reasonable recipient of it with knowledge of the terms of the lease was left in no doubt that the tenant wished to determine it but had wrongly described the date for doing so. In his leading judgment Lord Justice Nourse said this at page 1588:-

“Had it not been for the requests for a new tenancy enclosed with the letters of 14th September and 4th October, the position would have been straightforward. The notices were expressed to be served pursuant to clause 7 of the lease, which empowered the plaintiffs to determine the term thereby granted at the expiration of the tenth year, that is to say on 23rd June 1995. A reasonable recipient of the letters with knowledge of the terms of the lease would have known that that was the date, and the only date, on which it could be determined. He would also have known that the date of the lease was 10th July 1985 and that the dates specified for the expiration of the notices, 9th July 1995, was the expiration of the tenth year from that date. In that state of knowledge, the reasonable recipient would have been left in no doubt that the plaintiffs wished to determine the lease on 23rd June but had wrongly described the date for determination as 9th July.

It is said, however, that this straightforward view of the matter cannot stand with the plaintiffs’ simultaneous service of the requests for a new tenancy under section 26. It is said that, from a reading of the letter and the request together, the reasonable recipient would, or at least could, reasonably have concluded that the plaintiffs intended to remain in possession until the new tenancy began on 10th July, and that because they could not reasonably be taken to have intended to be trespassers between 24th June and that date they did indeed intend to determine the lease on 9th July. Coupled with that basic submission are submissions to the effect that if the reasonable recipient had read the small print on the back of the section 26 requests, or if he had considered the implications of Commercial Properties Ltd v Wood [1968] 1QB 15, or if he had looked at section 26(4) of the 1954 Act, his mind would, at the least, have been afflicted with reasonable doubts as to the plaintiffs' true intentions.

These submissions are unrealistic. While I gladly credit the reasonable recipient, this paragon of the law, with the eyesight, omniscience and diligence that they demand of him, in the end he could only reasonably have concluded that the plaintiffs, in specifying 10th July, had intended to specify the day following the day on which they wished to determine the lease by the notices under clause 7. In other words, the reasonable recipient would have been left in no doubt that the plaintiffs wished to specify 24th June as the date for the commencement of the new tenancy but had wrongly described it as 10th July.”

At paragraph 6 of his written submissions Mr Munro for the landlords summarised his contentions, which were enlarged by him in argument, as to the landlords possible understanding of the letter of the 5^th January 2004 in this way:-

“6

The reasonable recipient would not know whether the tenant wanted to exercise the break on 22^nd August 2004 or 7^th November 2004. The reasonable recipient might think that the tenant wanted to exercise the break in accordance with the terms of the lease. Equally the reasonable recipient might look at the references to the 22^nd August 2004 in the first two sentences of the letter and think that the tenant was trying to determine the lease on the 22^nd August 2004 and only that date because he did not want to pay the reviewed rent.”

Mr Munro referred me to a number of other authorities which he had cited to the Master. I do not understand him to have submitted that they added anything to the decisions on Mannai and Garston. I think that that is correct but I note that in the more recent case of Fernandez v McDonald 2004 1 WLR 1027 a decision of the Court of Appeal Lord Justice Potter commenting on the Mannai case said “but Lord Steyn made it clear that the reasonable recipient should be left in no doubt as to what was intended by the notice.” In my judgment, with respect, that sentence encapsulates the law on this subject provided it is noted that Lord Steyn in the extract from his speech in Mannai at page 768 which I have quoted above expressly approved the test adumbrated by Lord Justice Slade in Delta Vale Properties Ltd v Mills that notices may be valid if they are “sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate”. He went on to say “that test postulates that the reasonable recipient is left in no doubt that the right reserved is being exercised.”

The Master dealt with these submissions at paragraphs 15 and 16 of his judgment as follows:-

“15

The real issue, it seems to me, in this case is whether the existence of that alternative date- namely the rent review date – can have made the notice such that the incorporation of that date into the notice makes it doubtful to the reasonable recipient what the tenant was intending by the notice. Mr Munro suggests that it is possible that the recipient of the notice would have understood the giver of it to be intending to break the lease at the review date and that if he could not break the lease at the review date but could only break it at the end of the third year of the term, he might have decided that having had to go through the expense and effort of the rent review he would not want to give up the lease thereafter until he had, so to speak, got the benefit of that over the remaining years of the lease.

16

I think myself that that particular line of thought is rather fanciful. In my view, given that it is plain from the lease, and known to the landlord, that the third anniversary of the lease is a date in November, and given that that is the only date on which the lease can be broken, and given that the terms of the notice stating that what the notice is doing is “exercising our break option in the lease at the end of the third year of this lease”, that there really is no other way in which a reasonable recipient of that notice could understand it other than as being a notice to terminate it at the end of the third year of the lease, and the reference to the 22^nd August must have been apparent to an informed recipient of the notice as being a mere mistake. The fact that the 22^nd August is a date which does appear in the lease, would, it seems to me, not so much create perplexity in a reasonable recipients mind as offer an explanation to a reasonable recipient as to why the mistake has been made and why this inappropriate date has in fact been inserted in this notice of the intention to break at the permitted date of the expiry of the third year of the lease.”

Mr Seitler QC for the tenants advanced four propositions. His first proposition was that the starting point for the court in considering the effect of the alleged notice is to look at the role of the information found to be incorrect and he referred me to the passages in speech of Lord Steyn at pages 767 and 782 which I have cited above. He pointed out that, as in the Mannai case, the contract did not require the notice to state the precise date at which the tenant wished to break the lease. It followed so he submitted, that that date in the context of this underlease, was of minor importance. The question was, and this led to his second proposition, whether a reasonable recipient, knowing the terms of the lease, could have thought that the tenant meant to effect a termination on the 22^nd August 2004. Again he cited form the speech of Lord Steyn at page 768 B. Although he correctly accepted that it could not be decisive of this appeal, he pointed out that the correspondence which I have set out above can only be read as indicating that the landlords, from the moment that they received the letter of the 5^th January, realised that it was a notice to operate clause 6.8 of the underlease and that the inclusion in that letter of the date the 22^nd August 2004 as the date when the break was to operate was a mistake on the tenant’s part.

Mr Seitler’s third proposition was that this was not a case where the circumstances required the court to subvert what was clear from the correspondence to be the tenant’s intention in writing the letter of the 5^th January, namely, to break the lease by operation of clause 6.8. And he drew attention to a passage in the speech of Lord Steyn in Mannai at page 771 emphasising the necessity under the modern law of interpreting “a notice to determine under a commercial lease to be interpreted not as a “technical document” but in accordance with business commonsense.”

Mr Seitler’s fourth proposition was to point to the passage in the judgment of Lord Justice Nourse in the Garston case and the approach of the Court of Appeal in that case declining to accept an “unrealistic” suggestion as to what the recipient of the notice in that case might be expected to have understood to be intended by the sender of the notice.

I accept Mr Seitler’s submissions. In my judgment, the passage from the Master’s judgment which I have set out above demonstrates that he correctly applied the principles set out in the Mannai and Garston decisions to the facts of this case. The suggestions made by Mr Munro, in his admirably clear and concise submissions for the landlord, as to how the landlords’ might have interpreted the letter of the 5^th January were, in my view, “unrealistic”. It is clear that a reasonable landlord with knowledge of the provisions of clause 6.8 of the lease would have understood that the letter of the 5^th January was intended to operate the provisions of that clause in order to break the sublease at the date for which clause 6.8.provided, namely, the 7^th November 2004 and that the date of 22^nd August 2004 contained in the letter as being the date for the breaking of the lease was a mistake on the tenants part. In my judgment the Master’s conclusion was plainly correct and I must dismiss this appeal.