Peaceform Ltd v Cussens and others

Notice — Option — Validity — Option in lease to acquire freehold — Exercise of option requiring at least three months’ notice expiring within specified period — Date of expiry of notice relevant to valuation and completion — Notice expressed to expire before three months — Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd — Whether notice valid By a lease granted in 1999, the claimant held a 25-year term of business premises from the defendant landlords. The lease contained an option in favour of the claimant to purchase the freehold reversion on specified terms. If the claimant wished to exercise the option, the relevant clause required it “to give to the landlord not less than three months notice… expiring not later than the 6th February 2004 (the Tenant’s Notice) then the landlord must on the expiration of the Tenant’s notice and on payment of the price… assure the reversion to the tenant”. Under the lease, the expiry date of the option notice determined the amount to be paid, the date of completion and the date from which interest would run. By a letter dated 27 August 2003, expressed to expire on 7 November 2003, the claimant purported to serve a notice to acquire the freehold reversion. The defendants denied the validity of the notice on the ground, inter alia, that it failed to give not less than three months’ notice. The claimant issued proceedings and, in contending that the notice was valid, relied upon Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 1 EGLR 57; [1997] 24 EG 122; [1997] 25 EG 138, to the effect that a reasonable recipient, with the requisite knowledge, would have understood that the notice was intended to expire on 7 December. Held: The notice was invalid. There was no reason why the expiry date should be read as 7 December or as any other date in the period during which the notice could have expired. The notice was not sufficiently clear and unambiguous so as to have left a reasonable recipient, with the requisite knowledge, in no doubt as to its terms. The following cases are referred to in this report. Keepers and Governors of John Lyon Grammar School v Secchi; sub nom John Lyon’s Free Grammar School v Secchi; John Lyon’s Free Grammar School v Berman [1999] 3 EGLR 49; [1999] 49 EG 100; (1999) 32 HLR 820 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; [1997] 2 WLR 945; [1997] 3 All ER 352; [1997] 1 EGLR 57; [1997] 24 EG 122; [1997] 25 EG 138, HL Peer Freeholds Ltd v Clean Wash International Ltd [2005] EWHC 179 (Ch); [2005] 1 EGLR 47; [2005] 17 EG 124 York v Casey [1998] 2 EGLR 25; [1998] 30 EG 110; (1999) 31 HLR 209, CA This was the hearing of a claim by the claimant, Peaceform Ltd, for declaratory and other relief in proceedings against the defendants, Gordon Cussens, Patricia Cussens and Roy Greengrass. Adam Rosenthal (instructed by Lattey & Dawe) appeared for the claimant; Mark Sefton (instructed by Barker Gooch & Swailes) represented the defendants. Giving judgment, Mr Stuart Isaacs QC said: [1] The defendants are the freeholders of a property known as Enfield House, 467 Baker Street, Enfield, Middlesex. The claimant is the tenant of the property under a 25-year lease between the parties dated 14 April 1999. By clause 11.1 of the lease, the claimant was given the option to buy the freehold reversion of the premises, upon the terms therein set out. [2] By a letter dated 27 August 2003 from the claimant’s then solicitor, Patel Tejani, to the defendants (the notice), the claimant exercised, or purported to exercise, its option to buy the freehold in accordance with clause 11.1 of the lease. This is the trial of a preliminary issue, ordered by Deputy Master Nurse on 29 March 2006, to be tried whether the notice validly exercised that option. The salient facts are not in dispute. [3] Clause 11.1 provides so far as material that: If the Tenant wishes to purchase the freehold reversion of the Premises (“the Reversion”) at any time before the 6th day of February 2004 and give to the Landlord not less than three months notice of that wish expiring not later than the 6th day of February 2004 (“the Tenants Notice”) then the Landlord must on the expiration of the Tenants Notice and on payment of the Price in accordance with the provisions of clause 11.2 together with the rents and all other sums payable under this Lease up to the expiry of the Tenants Notice assure the Reversion to the Tenant… [4] The notice was, so far as material, in the following terms: I hereby give you Notice that my clients wish to purchase the freehold of [Eliza House] in accordance with the option granted to them under clause 11.1 of the lease dated 14th April 1999. Under the terms of the option you are entitled to not less than 3 months notice and accordingly I confirm that this notice may be deemed to expire on 7th November 2003. The notice erroneously gave less than three months’ notice of the claimant’s wish to exercise the option: the date of 7 November 2003 stated in the notice as the date when it might be deemed to expire is obviously less than three months after the date of the notice itself. In a letter dated 27 October 2004, Patel Tejani said that this was a typographical error and that the notice should have stated that it would expire on 7 December 2003. [5] On 20 October 2003, Patel Tejani wrote a letter to the defendants that, after replying to certain matters raised by the defendants that are not now relied upon by the defendants at this hearing, repeated the error, stating that the notice would expire on 7 November 2003 and adding that, accordingly, completion was to take place on 21 November 2003, 14 days after the expiry of the notice (under clause 11.2.1 of the lease). [6] The leading case on the approach to the construction of the notice is Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] |page:68| AC 749*. In that case, a clause in two leases dated 11 March 1992 for a 10-year term from and including 13 January 1992 provided that the tenant could determine them by serving not less than six months’ notice to expire “on the third anniversary of the term commencement date”. By letters dated 24 June 1994, the tenant gave notices to determine both leases on 12 January 1995. By a bare majority, the House of Lords held that the notices were effective to determine the leases. ————————————————————————— * Editor’s note: Also reported at [1997] 1 EGLR 57 ————————————————————————— [7] Lord Steyn, one of the majority, stated, at pp767D-768G, four propositions relevant to the test to be applied: (1) The case was not one of a contractual right to determine that prescribed as an indispensable condition for its effective exercise that the notice must contain specific information. (2) The construction of the notice must be approached objectively. The question is how a reasonable recipient, with knowledge of the terms of the lease and, in particular here, the clause giving the tenant the option to purchase the freehold, would have understood the notice. (3) The purpose of the notice must be kept in sight. (4) In relation to the general class of unilateral notices served under contractual rights reserved (of which a notice under a break clause was one), even if they contained errors they may be valid if they are sufficiently clear and unambiguous so as to leave a reasonable recipient in no doubt as to how and when they are intended to operate. Statements in the speech of Lord Hoffmann, at pp774G and 779F-780G, are to a similar effect, and see also the speech of Lord Clyde, at pp781G-783A. [8] In York v Casey [1998] 2 EGLR 25, at p27K, Peter Gibson LJ expressed the test in terms of whether, notwithstanding the obvious or evident error in a notice, the notice read in its context is sufficiently clear to leave a reasonable recipient in no reasonable doubt as to the terms of the notice. In that case, a notice served under section 20(1)(c) of the Housing Act 1988 was held to be valid despite the fact that it incorrectly stated the termination date of the assured shorthold tenancy in question to be the same date as the date at which the owners’ agent wrote to the proposed tenant to offer the tenancy. The Court of Appeal held that it was clear beyond doubt from the letter that accompanied the notice that what was contemplated was a tenancy of six months certain. [9] For the purposes of the present case, it was common ground that the fourth of Lord Steyn’s propositions in Mannai referred to above should be approached in the way in which Peter Gibson LJ approached it in York, and that I should therefore consider whether the reasonable recipient of the notice would be left in no reasonable doubt as to its terms, as opposed to precisely how and when the notice was intended to operate. [10] I should make reference to two other cases cited by the parties. In Peer Freeholds Ltd v Clean Wash International Ltd [2005] EWHC 179 (Ch); [2005] 1 EGLR 47, the principles laid down in Mannai were applied by Evans-Lombe J in another case involving a notice under a break clause. The tenant held an underlease of commercial premises for a six-year term from 7 November 2001. The underlease provided for annual rent reviews from 22 August 1994. It contained a tenant’s break option, exercisable at the end of the third year of the term by six months’ written notice. On 5 January 2004, the tenant gave notice to exercise the break option “at the end of the third year of the lease on 22 August 2004”. The court held that the 5 January 2004 letter was a valid notice. It rejected the landlord’s argument that the notice was invalid because the notice period did not expire at the end of the third year of the term, that is, on 7 November 2004. It did so on the grounds that a reasonable landlord, knowing of the break option provisions, would have understood that the letter was intended to operate those provisions and that the letter, in referring to 22 August 2004, referred to a date that was a mistake on the tenant’s part. [11] In Keepers and Governors of John Lyon Grammar School v Secchi [1999] 3 EGLR 49, the Court of Appeal was concerned with the validity of notices, dated 11 February 1997, given by the tenants under section 42 of the Leasehold Reform, Housing and Urban Development Act 1993, seeking to obtain the right to acquire a new lease of two flats. The notices were served on the landlord the next day and gave 11 April 1997 as the date by which the landlord needed to serve a counternotice under section 45 of the Act. They were not sent to a third party who was a party to the leases until 23 April 1997. Under section 42(5) of the Act, the date specified in the tenant’s notice for service of the landlord’s counternotice must be a date falling not less than two months after the date of the giving of the notice. By its counternotice, the landlord disputed the tenants’ right to acquire new leases on the ground, among others, that the date of 11 April 1997 specified for the landlord to serve its counternotice was less than two months after the giving of the tenants’ notice. The Court of Appeal upheld the landlord’s contention. In doing so, it rejected the tenants’ submission, based on Mannai and York, that the tenants’ notices, read through the eyes of a reasonable recipient with familiarity with the Act, should be read as giving the landlord the minimum time to respond with a counternotice as was consistent with the Act. [12] Aldous LJ, with whom Tuckey and Beldam LJJ agreed, recorded, at pp51M-52A, the landlord’s submissions that: In the present case the date was chosen by the tenants to set the time for the counternotices. The landlord could not know when the notices had been given to the third party and therefore had to rely upon the date in the notices. As it turned out, the third party was not given notice until 23 April. It followed that the date for the service of the counternotices could not have been 12 April, as was suggested to be the obvious date to be inferred by the landlord when he received the notices. There was no way in which the notices could be construed as requiring the date for the counternotices to be no later than 23 June. It followed that, even applying the principles set out by the House of Lords in the Mannai case, these notices cannot be saved. Aldous LJ, at p52A-D, then agreed with those submissions: It is quite clear, and I think was really conceded by [counsel for the tenants], that if the time for service of the counternotices started to run from the later of the dates upon which notice was given to the landlord and the third party then the principles in Mannai could not be applied. Even if the date for the counternotices only ran from the date of the notices that had been given to the landlord, I do not believe the notices could have been saved by construing them according to the principles set out in the speeches in the House of Lords. I see no reason why the date of 12 April would be evident as opposed to some other date after 12 April. This submission of the respondents also fails. [13] The claimant’s position is that the notice validly exercised the option. Mr Adam Rosenthal, who appeared on the claimant’s behalf, submitted that: (i) the notice is not required to stipulate a date for termination but merely to give not less than three months’ notice of the claimant’s wish to exercise the option; (ii) the reasonable recipient, to whom should be attributed knowledge of the fact that the tenant intended to give an effective notice and that there had been a slip of the pen, would be left in no doubt that the claimant intended both to exercise the option and to give three months’ notice of that intention; (iii) the mistaken reference to 7 November 2003 does not, in those circumstances, invalidate the exercise of the option; (iv) adopting a commercially sensible construction, the notice ought to be construed as having expired on 7 December 2003. He submitted that the date of 7 December 2003 could be gleaned as the correct date because the reasonable recipient would look to ascertain the correct date in the most straightforward way, which here involved the substitution of December for November. [14] The defendants’ position is that the notice was an invalid exercise of the option unless a different and longer expiry date could be substituted. Mr Mark Sefton, who appeared on the defendants’ behalf, accepted that the reasonable recipient of the notice would have understood that, had the claimant addressed its mind to it, it would have wanted to specify a different expiry date from that of 7 November 2003. However, he submitted that this was not sufficient to render the notice a valid exercise of the option since the notice left the reasonable recipient in reasonable doubt as to how and when it was intended to operate. There was a range of dates between 28 November 2003 and |page:69| 6 February 2004 when the notice could have expired; no necessary reason why any one those dates must have been intended; reasons from the tenant’s viewpoint why an expiry date longer than the minimum might have been intended; and consequences flowing from which was the relevant intended date, since the expiry date determines the amount that the claimant must pay the defendants on completion (under clauses 11.1 and 11.2.1), the date of completion (under clause 11.2.1) and the date upon which interest runs on the purchase price (under clause 11.2.3). [15] I prefer the defendants’ submissions. I accept that there is no requirement in clause 11.1 that the notice must contain specific information as an indispensable condition for the effective exercise of the right to exercise the option to buy the freehold. If that had been the case, the other propositions stated by Lord Steyn in Mannai would not have had relevance. I also accept that the mistaken reference in the notice to 7 November 2003 does not of itself invalidate the exercise of the option. Applying Mannai, the question is whether the notice was sufficiently clear and unambiguous to have left a reasonable recipient, with knowledge of the terms of the lease and, in particular clause 11, in no doubt as to the terms of the notice. In both Mannai and Peer Freeholds, the expiry date of the notice period was clearly defined. In Mannai, the notice was to expire on the third anniversary of the term commencement date. In Peer Freeholds, the break option was exercisable at the end of the third year of the term. In York, the context, namely the letter accompanying the notice, made the terms of the notice clear. In contrast, in the present case, the notice period is of not less than three months expiring not later than 6 February 2004. It is not referable to a particular date or occurrence and the expiry date of the notice period is not clearly defined, nor is it clear from the context. There is, for example, no reason why the expiry date should evidently be read as 7 December 2003 or as any other date in the period when the notice could have expired, even assuming, in the claimant’s favour, knowledge on the reasonable recipient’s part that the tenant intended to give a valid notice and had made a slip of the pen. In my judgment, the notice was not sufficiently clear and unambiguous as to have left a reasonable recipient, with the requisite knowledge, in no doubt as to its terms. The case is in this respect akin to Keepers and Governors of John Lyon Grammar School. The reasoning in the judgment of Aldous LJ in that case is instructive, although I should emphasise that that case is not on all fours with the present case and that my decision in this case is not dependent upon it. [16] I should add that the defendants also relied upon the provisions of clause 11.2.7, whereby time is expressed to be of the essence in respect of all the provisions of clause 11. I reject that submission. I consider that the claimant is right in saying that the proper construction of the notice is unaffected by time being of the essence so long as the option was exercised before 6 February 2004. The defendants also relied upon 7 December 2003 having been a Sunday as making it improbable that this was when the period of the notice expired. I place no weight on that submission. [17] The preliminary issue must therefore be answered in terms that the letter dated 27 August 2003, from the claimant’s then solicitor, Patel Tejani, to the defendants, did not validly exercise the option to buy the freehold in accordance with clause 11.1 of the lease. I shall consider with counsel the consequential orders that flow from this judgment. Notice invalid.