landlord's ignorance is bliss
Courts consider break clauses again…
7 February 2012
The issue
On 17 January 2012, in the case of Avocet Industrial Estates
LLP v Merol Ltd and another [2011], the High Court was asked
to consider whether a break clause in a commercial lease had been
complied with in circumstances where the tenant owed default
interest under the terms of the lease but it had not been formally
demanded by the landlord and a payment due on the break date was
made by cheque.
The background
The lease included a break right for the tenant that was subject
to several conditions, including that the tenant must pay a sum
equal to six months’ rent on or before the break date and that the
break notice would be of no effect if at the break date any
payments due under the lease had not been paid.
Separately, the lease provided for default interest to be paid
if any annual rent or other money payable under the lease had not
been paid by the date on which it was due, whether it had been
formally demanded or not.
The landlord and tenant had also entered into a rent deposit
deed, which entitled the tenant to receive interest on the deposit
every six months, unless they were in arrears with any
payments.
The facts
The tenant served a break notice in the required form and within
the time required by the lease, together with a covering letter
which stated it was not aware of any breach of the lease terms and
noting that the landlord had not drawn on the rent deposit. A
cheque for the interest on the deposit was then received from the
landlord that same day, which the tenant duly cashed. No
substantive response to the break notice was, however,
received.
Between serving the break notice and the break date itself, the
tenant was late with payments due under the lease on three
occasions. The landlord did not, however, issue a demand for
default interest.
On the break date the tenant returned the keys and vacated the
premises with written confirmation stating that it did not believe
there were any defaults pursuant to the lease and sent the landlord
a cheque for the sum equal to six months’ rent which was payable as
a condition of the break clause. The landlord then wrote to the
tenant stating the break notice was ineffective because default
interest was outstanding and the cheque payment did not provide the
landlord with cleared funds at the break date. The landlord issued
proceedings.
The decision
On the issue of the cheque, the court found in favour of the
tenant. During the first three years of the lease the tenant had
made all payments by cheque which had been accepted by the landlord
and this therefore gave rise to an implied agreement that the
landlord was happy to accept payment by cheque. In addition, the
landlord had not rejected the cheque promptly and was therefore, in
any event, deemed to have accepted it.
On the question of the default interest, however, the court
found for the landlord. The court took the view that the tenant had
the means to calculate the sums due by way of default interest and
the lease did not require the landlord to first demand a sum in
order for it to be due for payment. The court did consider that it
might be possible to argue that the landlord’s act of paying the
interest on the rent deposit back to the tenant gave rise to a
representation that the tenant was not in default and therefore did
not owe anything to the landlord. On the facts, however, the court
determined that the landlord knew the tenant was not aware of the
obligation as a result of the written confirmation provided on the
break date and the landlord was not aware that the tenant did owe
default interest until it later sought legal advice. On this basis,
therefore, the court found that there could be no estoppel by
representation through silence.
Practical steps
Mr Justice Morgan deciding the case considered that the result
was a ‘harsh one’ but found that he was bound to come to the
conclusion he did on the default interest as he was obliged to
construe the requirements of the break clause strictly. Tenants
should therefore be alert to the requirements that they must
satisfy in order to validly exercise their break right and take
pains to ensure, as far as possible, that the pre-conditions that
the break clause is subject to are minimal at the time of entering
into the lease. If a tenant is faced with a potentially
wide-reaching break clause, however, then the safest course of
action will undoubtedly be to give consideration to all types of
payments that may be payable pursuant to the lease and to pay them
over prior to the break date (or even the date of serving the
notice). While it may subsequently transpire that not all of those
payments were due to be made, it should be possible to recover such
payments after the break date and in any event it will undoubtedly
have been a lesser expense than being bound by the lease for the
remainder of the term.
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