Commercial lease lessons

Risk management case study: service of notices in commercial leases

On behalf of Lockton, the authors provide a case study highlighting the importance of having robust procedures for checking and complying with notice provisions in a commercial lease.

Case summary

Big Heads Ltd (BHL), a company specialising in the design and manufacture of custom-made bobble hats, leased a small warehouse in Glasgow from which it ran the business. BHL entered into a 10-year lease with Lovely Landlord GmbH (LLG), registered in Germany, on 1st January 2015 and took entry on 15th January 2015. Under the terms of the lease, BHL had the option of terminating the lease at the expiry of five years from the date of entry – that being 15th January 2020 – subject to BHL providing LLG with six months prior valid written notice.

Over the course of 2019, BHL decided it wished to exercise the break option and terminate the lease as at 15th January 2020. BHL approached a solicitor who had assisted them previously in relation to an unrelated contractual dispute, Mr Joe Bloggs of Bloggs & Co LLP (Bloggs & Co). Mr Bloggs had no prior experience of dealing with commercial leases. Mr Bloggs was instructed on 1st June 2019, shortly before the deadline for the six-month written notice period, to serve a break notice on LLG.Mr Bloggs reviewed the lease and noted the following provisions relating to the service of formal notices:

“Any notice to the Landlords shall be sufficiently served if sent by Recorded Delivery Post to their Head or Registered Office or if the Landlords are incorporated outwith the United Kingdom, at such other address as may be notified in writing to the Tenants for such purpose.”

Mr Bloggs issued a break notice dated 4th June 2019 to LLG’s registered office address in Germany as stated in the lease. Unfortunately, the notice was subsequently returned to Bloggs & Co, marked as having been undelivered due to ‘change of address’. Mr Bloggs then issued a further break notice dated 12th June 2019 to LLG to their correct registered office address, which he identified from an online search. That notice was posted on 13th June 2019 and received by LLG according to Royal Mail track and trace on 19th June 2019, four days after the 15th June deadline.

Bloggs & Co received an email from LLG’s Scottish solicitors, Law LLP, on 25th June 2019 advising that, since LLG had not received the break notice timeously or in compliance with the relevant terms of the lease, they were proceeding on the basis that the lease would continue in full force and effect for the remainder of its term, until January 2025.

The claim

A claim was intimated by solicitors acting for BHL to Bloggs & Co for loss as a result of their failure to take steps to validly exercise BHL’s option to terminate the lease at the end of the five-year period, meaning they were tied into having to pay rent and comply with all other tenants’ obligations under the lease for a further five years.

Bloggs & Co duly intimated the claim to insurers.

Lessons to be learned

(i) Service of the notice

The direct cause of the claim against Bloggs & Co was their failure to take appropriate due diligence steps to check LLG’s correct registered office address before issuing the original break notice.

Given the litigious nature of service of notices in commercial leases, it is vital to carefully check the notice provisions in the lease, including checking addresses, the entity on whose behalf the notice requires to be served, the entity on whom the notice requires to be served, what deadlines apply and also which methods of service are permitted.

Bloggs & Co erroneously relied on the address details contained in the lease without checking whether there had been any change to LLG’s registered office address or any written notification from LLG of another address (perhaps in the UK) where notices could be served. Given Bloggs & Co knew that the break notice had to be served within a short timescale from their instruction, they should have checked the address, or checked if their clients had received notification of a UK address where it could be served, before issuing it. Had they done so, either the notice may have been served on time or there might still have been time to correct any problems with the initial attempt at service.

If in any doubt, a belt and braces approach may be best – for example, serving more than one version of the notice, each by different means or to a different address. While this might be slightly more expensive for the client, it’s a way of being sure to have covered all the bases: so, a lot less expensive in the long run.

(ii) Dabbling

The underlying cause was that Bloggs & Co agreed to act for existing clients in relation to an area of law in which they acknowledged they had no experience. That is always risky.

Commercial leasing is a specialised field and solicitors who are not experienced in this area should be wary of accepting instructions to service notices under a commercial lease. Often what may seem straightforward and uncontentious to the uninitiated may prove to be anything but. It is always better to turn away a modest fee than risk a substantial professional negligence claim. This is particularly the case with agricultural leases, again a specialised area of its own, and one fraught with traps for the unwary.

Risk management

It is usually the case that professional indemnity claims against solicitors arise not from technical incompetence but rather through failings in a firm’s procedures, systems, checks and record keeping. In the case of serving notices, solicitors would benefit from putting in place a set procedure for checking the notice provisions in the lease and ensuring that the requirements for valid service are understood and met. Lockton has helpfully prepared a Commercial Lease ‘Notice to Quit’ Checklist, which solicitors can use and adapt to their needs.

An added safeguard is for solicitors to adopt a procedure whereby a second pair of eyes – ideally, if possible, a litigation colleague with experience in contentious property matters – reviews the draft notice to check all requirements are being met.

Written by Stuart Craig and Lynne Cardow, DAC Beachcroft Scotland LLP