At first instance, the judge followed the conventional approach in Commercial Union [2001] where it was held that ‘material compliance’ involved looking to see whether it was fair and reasonable to L and T for the lease to end. But, the CA has now said that this approach was wrong. In its view, break clauses are to be strictly applied and simply adding the words ‘material’ to the clause does not mean it is relevant to consider what is fair and reasonable between the parties. The key point is that ‘material compliance’ is to be judged objectively.

Contrast that with the approach taken by the judge at first instance. He looked at a host of subjective factors (eg had T taken reasonable steps to comply and followed professional advice; had T tried to get L’s agreement; had L refused T’s attempts to agree on the scope of works needed, would it be reasonable to T to prevent it from ending the lease; had T used reasonable endeavours to comply with the covenants, etc). In the CA’s view, all such issues are irrelevant, as are concepts such as ‘fair and reasonable’. What can be taken into account, however, is L’s ability to relet or sell the property without delay or extra cost. The idea is that L should not be left with a property that is difficult to market because T has not complied with its covenants. Other than that, you have to look entirely objectively at the situation.

A note from Denton Wilde Sapte makes the point that it is difficult to reconcile the CA saying that it is relevant to look at L’s ability to relet the premises with the rest of the CA decision. First the court is saying that you simply look at whether the breach is ‘material’ and ignore other factors. Then, it goes on to say that the impact on L can be important. In simple terms, it is difficult to see why a breach should be more ‘material’ when it has a major effect on L, given that we are told to ignore T’s actions. The end result, however, is that we now have clear guidance that one should ignore overall concepts of fairness and reasonableness, and instead adopt an objective approach as to what is ‘material’. The smaller number of relevant factors will no doubt make it easier to decide individual cases. One wonders, however, whether the emphasis in evidence will now shift from the severity (or otherwise) of T’s breaches, to arguments about the state of the letting market and the impact that T’s breaches will have on L’s interests. If that does happen, then that surely is not something that can be welcomed. See note on Fitzroy House v Financial Times [2006] EWCA Civ 329. Source: Denton Wilde Sapte.  © Practical Lawyer