High Court holds that a limited partnership did not validly exercise a break clause in a lease

The High Court has held that a limited partnership (LP) did not validly exercise a break clause in a lease. 

In Vanquish Properties (UK) Limited Partnership v Brook Street (UK) Limited, the LP had taken an overriding lease of the building of which the tenant's premises formed part.

The LP served a contractual break notice which the tenant challenged, arguing that the LP was not able to serve the break notice. The tenant/defendant said that the LP – with five partners – could not constitute the landlord and could not exercise the landlord's break clause under the lease. The High Court agreed and dismissed the claim.

It is important to remember that a legal estate in land can only be held by a legal person or persons to a maximum of four. Unlike a limited company, or a limited liability partnership, an LP (like an ordinary partnership) is not a distinct “legal person”, but simply “a combination of persons for the purposes of carrying on a particular trade or trades" (Re Barnard). In the case of a limited partnership with five partners, the legal estate cannot therefore be vested in more than four partners who will hold the legal title in trust for all the partners. This is clear from section 34(2) of the Trustee Act 1925 and section 34(2) of the Law of Property Act 1925. Normally, an LP will hold property through a trust or nominee company to avoid any problem from arising.

The judgment concerned premises on the lower ground floor of 108 Fenchurch Street, London EC3 which is part of a seven-storey building. By a lease dated 17 October 2011, the Mayor and Commonalty and Citizens of the City of London let the premises to Brook Street for a term of 10 years from 28 October 2011. Clause 7 of the lease contained a break clause exercisable on 27 September 2016 on giving 6 months’ notice. On 22 March 2016, the City Corporation granted an overriding lease to Vanquish Properties in effect making them Brook Street’s landlord and on the same day Vanquish gave notice to Brook Street under the break clause. The principal issue in the claim was whether the break clause had been correctly operated to bring the lease to an end on 27 September 2016. A second issue concerned whether a notice under section 25 of the Landlord and Tenant Act 1954, served at the same time as the break notice, was valid. However, a decision as to the validity of the break notice would, in effect, determine the second issue.

The claimant's primary case was that both notices were valid on the basis that the limited partnership was, at the date of service of the notice, "the lessors" for the purposes of clause 7 of the lease and the competent landlord for the purposes of the 1954 Act. The claimant's secondary case was that if the overriding lease did not vest in the limited partnership then Vanquish GP Limited (one of the partners) became the defendant's landlord upon the grant of the overriding lease. The claimant's secondary case relied upon the decision of the House of Lords in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd which stated that minor defects in unilateral contractual notices will not necessarily invalidate the notice if the reasonable recipient, with knowledge of the factual and contextual background, would not be perplexed by the error.

The defendant's case was that both notices were invalid because they were given by a party who was not the defendant's landlord under the lease. Furthermore, the defendant said either that the break notice could not be saved by the Mannai principle because essential preconditions for the operation of the break clause were not met or, alternatively, that a reasonable recipient would not have understood the notice in the manner the claimant suggested.

Chief Master Marsh sitting in the High Court found in favour of the defendant. He said that it may be possible to construe a lease granted to a tenant in the name of a partnership as being a lease granted to the partners, provided, as in Wray v Wray, their number does not exceed four. However, it is impossible as a matter of construction to determine how the legal estate is held where there are more than four partners. Accordingly the overriding lease to Vanquish Properties was not validly granted.

As a result the contractual break notice was not properly given by “the landlord” as it referred to Vanquish being the landlord under the lease but this description in the notice was not correct and Vanquish was not in a position to give the notice as the landlord. Finally, the notice could not be saved by the Mannai principle as a “reasonable recipient” of the notice would have been confused by it.

In essence the claim failed because a mistake initially occurred when the overriding lease incorrectly named the LP as the lessee and that mistake was repeated in the contractual break notice.

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