Termination notice deemed invalid
FRIENDS LIFE v SIEMENS HEARING INSTRUMENTS (CA) [2014]
The Court of Appeal (CA) has held that a termination notice was invalid because it was not given strictly in accordance with the exact terms specified in the agreement. This decision shows it is necessary to adhere very precisely to all the requirements of a termination clause in order to avoid or minimise the risk of a termination notice being deemed ineffective.
Facts:
- Siemens (S) entered into a lease for 25 years as a commercial tenant with Friends Life (F) from 24 August 1998. Clause 19.2 contained a tenant's break clause which stated that any notice to terminate the lease had to be: “expressed to be given under section 24(2) of the Landlord and Tenant Act 1954” (LTA).
- In September 2012 S served a break notice on F, indicating an intention to terminate the lease on 23 August 2013. The notice that S gave did not contain words referring to the LTA, although it complied with the clause in all other respects and even specifically referred to clause 19.2.
- The question for the Court was whether the notice was valid. The High Court (HC) held that it was.
- F appealed.
Decision:
- The CA overturned the HC ruling and held that because the notice did not comply with the precise requirements of clause 19.2, it had not been successfully exercised.
- S argued that there was sufficient compliance if the notice achieved the purpose of the clause’s requirements but this was rejected. Here the formal requirement that the notice be expressed in a particular way had not been complied with as there was simply no reference in the notice to s.24(2) at all. 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 - which was the outcome in this case.
- The CA seemed to place particular emphasis on the fact that this provision concerned a unilateral option. It said that in the field of unilateral contracts or options, there was no room for substantial compliance.
Points to note:
- The CA took a strict approach to the validity of the termination notice and said that despite substantial compliance with the contractual requirements, this was not enough and the consequences of a failure to comply with the express terms should not be taken into account - it did not matter that the reference to s 24(2) would not have made any difference.
- This was acknowledged by the CA to be a harsh result but serves as a warning to be very careful about what wording is used when terminating a contract; as the CA itself said, “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”.
- It is not just the wording of the notice that is important. Also check compliance with the termination clause in relation to:
- Procedure – what does the contract say in terms of sequence and timing of a termination notice?
- Time limits – is there a specified time limit that needs to be complied with?
- Method of service – how does the notice have to be served to comply with the contract?
- Appointed person – does the contract specify who is to give or receive notices.
Failure to do so could result in a wrongful termination or a challenge by the other party as to the validity of the termination notice.