The importance of Notice Clauses in Commercial Leases
The importance of Notice Clauses in Commercial Leases
A Notice Clause in a lease sets out how notices are served from the landlord to the tenant and vice versa. That’s not really a surprise. However, we frequently find that clients tend to take the Notice Clause for granted and don’t really read it and sometimes don’t understand it. If this happens there can be unintended consequences resulting in costs running into the thousands.
When a lease is being negotiated, it would be reasonable to say that a lot more consideration is given to some of the other key provisions in the lease.
However, there is a growing number of decided cases where both landlords and tenants have come to grief for failing to comply with the terms of the Notice Clause in the lease. This is because they either didn’t properly comply with the Notice Clause or they failed to understand the Notice Clause requirements.
Sometimes the lease will contain a break option. This allows the landlord or tenant or both to bring the lease to an end before it’s termination date. It’s very important to pay attention to the time frames involved and what the Notice Clause says about how any notice under the lease should be served. Pay attention to the requirements of the break clause and then check the terms of the Notice Clause.
To exercise the break option, first of all, the party exercising the right to break should check that it has complied with all the conditions contained in the lease. If there has been a breach of some description, the Notice Clause might make provision that all terms of the lease must have been observed otherwise any notice given will be invalid. That means even if notice is properly served, it will be completely ineffective and the lease will continue on past the break option date. It it’s the tenant who wishes to exercise the break option, this could prove very costly indeed!
However, if the Notice Clause doesn’t contain anything about the conditions of the lease being observed, the landlord may suffer loss if the tenant who is in breach of some of the conditions of the lease exercised the break option and properly serves notice thus bringing the lease to an end. The only remedy then available to the landlord is likely to be litigation. That could prove lengthy and expensive.
One of the things in Notice Clauses that’s often overlooked is any requirement on the landlord’s part to acknowledge receipt of the notice. What that might mean is that if there’s some sort of error in the notice process, the tenant might only discover that the error has been made until it’s far too late to do anything about it. Perhaps, going forward, we’ll begin to see requirements on the parties to acknowledge receipt of a notice that’s been properly served. However, if the notice or service of the notice is defective in any way, an acknowledgement alone is unlikely to be sufficient to cure the defect.
The only way you can be sure that the notice has been properly served is for the party serving the notice to fully comply, in full, with the terms of the Notice Clause.
The simple things should be checked fist. Review the party on whom the notice is to be served – have they changed their name? Is your original landlord still your landlord? Which address should be used for service? If it’s the Registered Office, is the address shown in the lease still the Registered Office of the other party?
How should the notice be served? Frequently, this is critical. If the Notice Clause calls for the notice to be served by recorded delivery mail, serve it by recorded delivery mail. As a courtesy, you can send a copy by fax, email or first class post – but if you fail to send it by recorded delivery mail (or other service method as prescribed by the Notice Clause) the notice will be completely ineffective.
Check the time limited contained in the Notice Clause and make sure you give yourself breathing space to serve the notice in sufficient time. Again, a notice served outwith the time limits prescribed will be ineffective and unenforceable.
Finally, we need to consider the principle of tacit relocation. This means that, in Scotland, a lease will continue should the landlord or tenant fail to give the other notice of termination prior to the termination date. If the landlord or the tenant should fail to give 40 days clear notice (as well as complying with all the other terms of the Notice Clause), the lease will continue for its original term or a further one year (if the lease if for more than one year). Neither party has to do anything for this principle to apply as it’s the default position in every lease in Scotland. Any tenant who thinks all they have to do is move out, is likely to be upset in having to continue for a further period of the tenancy, with all the attendant costs. On the other hand, a landlord caught by this principle may find that it cannot re-let the property to another party because this principle has applied.
Whilst Notice Clauses in commercial leases might seem innocuous and sometimes are "taken as read”, it is essential that they’re fully understood otherwise, as we have shown, failure to comply with them can have very far reaching consequences.
If you are a landlord or tenant and wish to discuss any element of your commercial lease, please get in touch.