this article was taken from our December 2019 newsletter
There are many clauses in commercial leases that practitioners take time to negotiate to ensure that their client is protected. Sometimes clients assume that the Notice clause in the lease requires no discussion and can be “taken as read”. Unfortunately, taking that attitude can sometimes lead to unintended consequences and could be very costly in the long run.
It would be fair to say that when a lease is being negotiated, a lot more attention is given to other key provisions in the lease than clauses covering notices. There are now, however, a number of cases that have been decided where both landlords and tenants have fallen foul of failing to comply with the terms of the notice clause – either because they didn’t properly comply with them or they failed to properly understand their requirements.
It is no longer unusual for there to be a break option in a lease – exercisable on a mutual or, more usually, on a tenant only basis. That being the case, landlords and tenants should afford themselves sufficient time before the trigger date to review the provisions of the Notice clause in order to identify any issues that might affect the ability to exercise the notice and bring the lease to an end.
The party wishing to exercise the option should check that it has complied with all of the conditions of the lease thus far (and these might not be contained in the Notice clause) otherwise even if they do serve the notice properly, they might discover it is invalid. If the notice is in relation to a break option, for instance, and the tenant wishes to bring the lease to an end, then even if the notice is properly served, the failure to comply with another condition in the lease may cause the notice to be invalid and that will mean that the lease will continue and the option to exercise the break option will have been lost. This could prove very expensive to the tenant.
On the other hand, from the landlord’s perspective, if a break clause doesn’t clearly set out the procedure and conditions relating to Notice and compliance with all of the conditions in the lease, then the landlord may find that the tenant can exercise the break option even though it has been in breach of other conditions in the lease.
There is an important aspect of Notice clauses that’s often overlooked and that’s the lack of any requirement for the landlord to acknowledge receipt of the Notice. This would mean that if an error has been made in the Notice process, the tenant might not discover that the error has been made until it is too late to do anything about it. Perhaps we will see the requirement on the recipient of the Notice to provide an acknowledgement creep into future commercial leases to put the matter of receipt of Notice beyond doubt (although whether acknowledging receipt alone will cure any defects in the service of the Notice will be something of a contentious issue!).
There is also a degree of uncertainty about how the courts will interpret the notice clause with some judges taking a more commercial approach with others taking the literal view of the terms of the Notice clause.
To be absolutely sure, the party serving the notice should comply in full with the terms of the notice clause to ensure that the notice takes effect.
The simple, straight forward things should be checked. When a notice is required to be served, review the details of the party on whom it is to be served. Has there been any change of name or, if the Notice clause provides for services at a Registered Office, then is the registered office still in the same location as it was at the commencement of the lease?
The method of service is also critical. There’s no point in hand delivering a Notice or having it server by Sheriff Officers if the only provision for service of the Notice is by first Class Recorded Delivery mail, as is usually the case. Failure to serve Notice by this means will render the Notice served by any other means invalid and therefore unenforceable.
Check your time limits within which Notice is to be served and give sufficient time to review the other terms of the lease to ensure that there isn’t an existing failure or breach which could invalidate the Notice.
It would be remiss of us not to mention tacit relocation, a principle that applies in Scotland where neither then landlord nor tenant has given notice of termination of the lease prior to its termination date. This means that if the landlord or tenant fail to give more than 40 clean days’ notice (complying always with the terms of the Notice clause), the lease will continue for its original term or a further one year (if the lease if for a period of more than one year) without either party having to do anything. This might well serve both parties well, however, if a landlord is expecting the return of the property or the tenant is planning to move out on the termination date, it is important that the lease is properly terminated by giving the appropriate notice otherwise it will simply “roll on” for a further year.
Notice clauses in commercial leases might seem quite innocuous but as we have shown, failure to comply with their terms can have far reaching consequences.
If you would like to discuss any aspect of your leases or have specific issues with regard to Notice clauses you wish to discuss, please call us on the number at the bottom of the page.