[2024] UKUT 51 (LC)

Paragraph 31, headed “How may a person bring a Code agreement to an end?”, enables the site provider to do so by serving a notice. That notice must specify the date on which the site provider proposes that the agreement should end (sub-paragraph (2)(b)), and that date must be at least 18 months ahead and must fall:

“31(3)(b) after the time at which, apart from paragraph 30, the code right to which the agreement relates would have ceased to be exercisable or to bind the site provider or at a time when, apart from that paragraph, the code agreement could have been brought to an end by the site provider.”

Sub-paragraph (3)(b) is in two halves. The first is relevant where a lease is near its term date. A Code agreement in the form of a ten-year lease commencing on 1 January 2020 would, but for paragraph 30, expire on 1 January 2030, but because it is a Code agreement it will not do so. A paragraph 31 notice could be served on 1 July 2028 with a proposed termination date of 1 January 2030, because that date is 18 months after the date of the notice and is the date on which the lease would have expired by effluxion of time. A paragraph 31 notice given on 1 January 2029 is valid if the date specified falls on or after 1 July 2030, and so on.

The other half of paragraph 31(3)(b) refers to leases that can be brought to an end by a landlord’s break notice or by a notice to quit under a periodic tenancy. The lease in the present reference contains provision for a landlord’s break notice, but let us use a hypothetical lease while we look at the construction of the paragraph in principle: imagine a Code agreement in the form of a 20-year lease, commencing on 1 January 2020 but making provision for the landlord to bring the lease to an end by giving 12 months’ notice to expire on or after 1 January 2030.

If the landlord gives a paragraph 31 notice on 1 July 2028, to expire on 1 January 2030, the first condition is satisfied because 18 months’ notice has been given. Likewise the paragraph 31 notice given in the present case gave 18 months’ notice.

As for sub-paragraph 30(3)(b), the respondent’s position in relation to the hypothetical case set out above is that that second condition is met, because the landlord could (but for paragraph 30) have brought the lease to an end on 1 January 2030 by giving a break notice on 1 January 2029. Whether or not it in fact served such a notice is irrelevant; the mechanism set up by the Code for bringing the agreement to an end replaces the contractual mechanism entirely.

The claimant’s argument is that the requirement that the lease “could have been brought to an end” is only satisfied if the landlord has, before serving the paragraph 31 notice, (a) met any preconditions set out in the lease to the exercise of the break clause and (b) served a valid break notice which would (but for paragraph 30) have had the effect of bringing the lease to an end on 1 January 2030.

Mr Lees put forward three arguments in support of that proposition.

First, he relies upon the words of the statute. It must be the case that the proposed termination date falls after the date on which “apart from [paragraph 30], the code agreement could have been brought to an end by the site provider.” Mr Lees argued that in the absence of a valid contractual break notice being served, the date stipulated in the paragraph 31 notice would not be such a date: it would not be paragraph 30 that prevented the Code rights being brought to an end, but the lack of a contractual notice.

We disagree. In such a case, the lack of a valid contractual notice would have no effect, because a contractual notice would have (by virtue of paragraph 30) no effect. On the other hand, if a valid contractual notice is served with or before a paragraph 31 notice, it is not the case that the agreement “could” (absent paragraph 30) be brought to an end “by the site provider” on the expiry of the contractual notice; on that expiry, the agreement would come to an end and there would be nothing the site provider could do after service of the notice to make that happen or prevent it happening.

The key word is “could”. It refers not to something that would actually happen absent paragraph 30, but to something that could have been made to happen absent paragraph 30. If the intention was that the landlord actually serve a break notice then (quite apart from the fact that one would expect the statute to say that expressly) the correct word would be “would”. Hence the word “would” in the context of the expiry of the lease: “the time at which, apart from paragraph 30, the code right to which the agreement relates would have ceased to be exercisable”; the lease would expire by effluxion of time without anyone taking any action, absent paragraph 30.

Second, Mr Lees argued that since this part of the Code is modelled on the 1954 Act, one would expect the same practice to be required. We know that the 1954 Act was a model both because the Law Commission said so in its 2013 Report (see paragraph 6.95 and following) and because the wording is so close to that of section 25 of the 1954 Act. And while no judicial authority can be found for the proposition that a break notice is required in addition to a section 25 notice in the context of the 1954 Act, Mr Lees argued that the textbook writers advise that both notices should be served.

1954 Act authorities are not binding in the context of the construction of the Code. Nor are textbook accounts of practice. 1954 Act authorities may however be informative; reference has been made, for example, to O’May v City of London Real Property Co Ltd [1983] 2 AC 726 in the context of the terms of new Code agreements. But care must be taken in comparing the two regimes. The Code is a different statute. The wording in section 25 of the 1954 Act is of course very close to what we see in paragraph 31, including the words “could have been brought to an end”:

“(3)

In the case of a tenancy which apart from this Act could have been brought to an end by notice to quit given by the landlord—

(a)

the date of termination specified in a notice under this section shall not be earlier than the earliest 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; and

(b)

where apart from this Part of this Act more than six months' notice to quit would have been required to bring the tenancy to an end, the last foregoing subsection shall have effect with the substitution for twelve months of a period six months longer than the length of notice to quit which would have been required as aforesaid.”

But the two provisions are not quite the same because the wording before and after “could have been brought to an end” are different from the wording surrounding the same phrase in the Code; in particular the reference to notice given on the same date as notice under section 25 has no parallel in paragraph 31 of the Code. And paragraph 30 itself is not reproduced in the 1954 Act; section 24 is in different terms. So there is room for the phrase “could have been brought to an end” to mean different things in the two different contexts. And of course nothing we say about the construction of the paragraph 31 of the Code has any authority in relation to the construction of the 1954 Act.

There is no judicial authority for Mr Lees’ construction of section 25. Ms Tozer KC referred to three cases that appear to contradict it. In Scholl Mfg Co Ltd v Clifton (Slim-Line) Ltd [1967] 1 Ch 41 the landlord served a section 25 notice and no separate break notice, and the section 25 notice was held by the Court of Appeal to be valid. Lord Diplock said at p 50:

“The [provisions of the 1954 Act] are not in addition to but in substitution for those terms contained in the lease or tenancy agreement which relate to tenancies coming to an end by effluxion of time or by notice to quit given by the landlord to the tenant.

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 [1954] Act to serve notice in accordance with those terms.”

In Commercial Properties Ltd v Wood [1968] 1 QB 15 the Court of Appeal reached the same conclusion, in a case where the lease stipulated that a break notice must expire at the end of the month. The landlord served a section 25 notice that did not. Again the Court of Appeal held that it was valid. Russell LJ said at p 25B:

“Section 24 of the Act of 1954 ousts the ordinary methods by which a landlord can terminate a tenancy such as this.”

The decision in Scholl was cited and followed in Blunden v Frogmore Investments Ltd [2002] EWCA Civ 573. Of course, cases about the 1954 Act are not binding upon the Tribunal in construing the Code; but these decisions are helpful in demonstrating that it is by no means clear that the textbooks would be right to say that a contractual notice is required in addition to a section 25 notice. Indeed, we do not think they go that far. In Reynolds & Clark, Renewal of Business Tenancies, for example, it is said at paragraph 3-202 that a section 25 notice can do “double duty” as a contractual notice (although it is “always wise” to say in a covering letter that that is the intention), but that where the lease imposes pre-conditions for the exercise of a break it “will be best in the circumstances” to serve a contractual notice in addition to the section 25 notice. That is some distance from a suggestion that it is a legal requirement.

Mr Lees’ third argument for his construction of paragraph 31 was that the statute interferes with the parties’ bargain to the minimum extent possible. Absent the statutory intervention the lease could have been brought to an end by a break notice on the terms set out in the break clause. That clause might specify pre-conditions, such as the payment of £1 million, and the tenant is entitled to have that pre-condition met. It might specify certain formalities for the giving of notice, whether silly ones (notice to be on pink paper) or otherwise, and the tenant is entitled to those formalities. There might be conditions subsequent, and they too have to be satisfied. To say that there is no need for the service of a break notice with or before a paragraph 31 notice is to interfere to the maximum possible extent with the parties’ bargain and that, Mr Lees argued, is not a sensible construction of the statute.

That submission needs to be unpacked.

So far as the break notice itself is concerned, we do not agree that if the lease prescribes certain formalities in the giving of a notice – whether the use of pink paper, or the giving of notice between dawn and dusk, or whatever – those formalities have to be observed in order to make a paragraph 31 notice valid. Such a requirement would be pointless since the formalities themselves would have no effect because of paragraph 30, and nothing in the words of the sub-paragraph that could imply such a requirement.

Staying with the break notice itself, what then is the position where a lease sets out various grounds for termination? It is commonplace for leases to do so (as does the OT Lease), so that the landlord can break the lease if for example it has planning permission for redevelopment or if it intends to use the premises itself etc. The claimant says that the service of a notice setting out the ground of termination is a formality to which the tenant is entitled, and that to allow a paragraph 31 notice to take effect without the service of such a notice deprives the tenant of the information to which it was entitled under the lease and, again interferes unnecessarily with the parties’ bargain.

We agree that as a matter of practicality the tenant has to be given that information, in order for it to assess whether the paragraph 31 notice was valid. The site provider might choose to provide that information in the form of an actual break notice (as did the respondent in this case), or it might simply tell the tenant the ground on which it could, absent paragraph 30, have brought the lease to an end. But that does not mean that an actual break notice has to be served; the site provider can simply inform the tenant of the ground on which it could have brought the lease to an end absent paragraph 30.

Conditions precedent or subsequent to the service of a break notice are a little more difficult to analyse. As to conditions subsequent, it is certainly possible for a lease to provide that a break notice, valid on the day it is given, can be rendered invalid by the failure to meet a condition subsequent. But the recipient of the paragraph 31 notice needs to know whether it is valid on the date that it is given. On the date that a paragraph 31 notice is given it cannot have been made invalid by the failure of a condition subsequent. Any argument that it can be made invalid later on that basis must wait for a case in which that is said to have happened; it is not appropriate for us to decide it on a hypothetical basis.

As to conditions precedent, we are sceptical of the proposition that a Code agreement might, as Mr Lees suggested, prescribe that a premium had to be paid by the site provider before the break clause could be exercised. It is difficult to imagine the circumstances in which a site provider might agree to such a pre-condition in the face of the likelihood that the payment would be for nothing because of the narrow scope of paragraph 31(4) (see paragraph 59 above). It is not argued that the paragraph 31 notice in the present reference was invalid because of the failure to meet a pre-condition, and there is no need for us to speculate about what would be the position if there were.

Mr Lees observed that if there is no need for the service of a break notice, a paragraph 31 notice “might be served on day one of the term of the agreement stipulating a date after which the contractual break might (but has not yet) been exercised”. That is correct. That is the right that paragraph 31 gives to the site provider, although it is an unlikely scenario. Equally the site provider might serve a paragraph 31 notice on day one of the term stipulating a date after which the lease would (absent paragraph 30) have expired by effluxion of time; again, it is unlikely but perfectly possible.

Accordingly we find that the service of a break notice is not essential for the validity of a paragraph 31 notice. On the date notice is given the recipient has to look at the proposed termination date and ask itself: does that date fall after a date on which the landlord could have brought the lease to an end? In other words, could the landlord, hypothetically, absent paragraph 30, have brought the lease to an end before the proposed termination date. It does not have to ask whether that date falls after a date on which the lease would in fact have come to an end, owing to the service of an actual break notice, but for paragraph 30.