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Tenants suffer in a raft of recent break cases

5 February 2013

There was a flurry of decided break cases in 2012, but the fact that these kinds of cases have reached court perhaps isn’t that surprising. Break pre-conditions are always interpreted very strictly and there is still no industry standard wording for break clauses. Landlords will often try and resist the inclusion of a tenant’s break or seek to frustrate them. Because of the lack of uniformity and the strict interpretation each break clause needs to be very carefully scrutinised. Add to these factors the financial squeeze on both landlords and tenants, the potentially high costs or loss of income for both parties and it’s easy to see why disputed break cases are often highly contentious.

We’ve featured the most common questions below and also reflect the recent court decisions. Given the number of cases in recent years the law in this area is susceptible to change, so always seek legal advice when interpreting break options.

My break is conditional upon paying all rents but the break date is mid-quarter. Do I need to pay the full quarter’s rent or only up to the break date?

If, as is usual, rents are payable in advance on the usual quarter days then unless the lease specifically allows it, rent cannot be apportioned. Therefore you would need to pay the full quarter and ensure it is paid on time. Depending on the wording of the break option itself it may be possible to obtain a refund of the rent relating to the period after the break to the end of the quarter. In PCE Investors v Cancer Research UK [2012] EWHC 884 (Ch)), based on similar lease terms the court held that the Landlord has an absolute right under the lease to the full quarter’s rent. It is also important to check the definition of rents as it is often widely drafted to include service charge and insurance. In those circumstances the break may require payment of the full quarter’s service charge and insurance therefore.

NOTE: Aspects of the PCE case are the subject of appeal, so look out for updates in due course.

I am not the original tenant but an assignee. The break clause states that only the tenant who assigned the lease to me can exercise the break; can I break the lease?

No, if the break clause specifically refers to a particular tenant, then only the named tenant can successfully operate the break clause. As a practical point therefore, an incoming assignee should always check whether the break option is personal to a particular party (Gemini Press Ltd v Cheryl Lindsay Parsons [2012] EWHC 1608 (QB)).

If the break is conditional upon payment of rents and other outstanding sums will payment by cheque be sufficient to satisfy that condition?

Technically a cheque is not an acceptable method of payment under a lease and would not therefore normally be accepted as discharging your obligations to pay on time. However, if you have regularly paid the rent by cheque (or the lease specifically allows it) then the position may be different and the court may well recognise and accept this as a valid form of payment (as held in Advocet Industrial Estates LLP v Merol Ltd [2011] EWHC 3422 (Ch)). However, even in those circumstances a prudent tenant ought to pay in cleared funds by a universally accepted method, such as a transfer directly into the Landlord’s bank account together with an appropriate reference.

My break clause requires that ‘all sums due’ under the lease must have been paid in full for the break clause to be effective. I think I have paid rent late before, and not paid any interest as required by the lease. If the landlord has not demanded this interest, will my failure to pay the interest element mean the break won’t be properly exercised?

Yes. Most modern leases entitle the landlord to interest if the rent is paid late. Even where the landlord has not demanded such interest or confirmed how much is owed if you fail to pay the interest the break conditions will not be satisfied. This was held in Advocet Industrial Estates LLP v Merol Ltd [2011] EWHC 3422 (Ch). In addition to paying the full quarter’s rent a tenant with a conditional break such as this should also now check if any rent was previously paid late. If there is any doubt in this regard a prudent tenant should consider paying to the landlord an additional sum (prior to the break) which is an amount at least the same as any possible interest which has accrued on late payment of the arrears.

My lease requires me, as a condition for exercising the break, to pay not only the rents payable up to the break date but also a lump sum payment. Do I need to pay all of these amounts and what is the best means of doing so?

As already mentioned, in breaks such as this unless there is express apportionment the tenant must pay the full quarters rent paid in advance. A tenant must also ensure that the lump sum payment is made by the relevant date – that it usually the break date but sometimes payment is required at the time of serving the break notice so check the precise wording of the break option. It may well be sensible to split the payments and identify each payment individually so that there can be no doubt which payment is the lump sum and which is the rent. Canonical UK Ltd v TST Millbank LLC – [2012] EWHC 3710 (Ch)) was a contested break case in which this decision was one part. This case is also being appealed in February.

In summary the courts’ decisions recently have generally been to the benefit of landlords and therefore tenants should continue to be very familiar with their precise break conditions and of course seek legal advice at an early stage.

Where there is any doubt tenants should take a very cautious approach. In many circumstances trying to engage with the landlord is a sensible first option. As a minimum the tenant should obtain clear advice about what needs to be done and when. In some circumstances a tenant might even consider putting forward an ex gratia payment to the landlord in lieu of full compliance of the conditions. From a commercial perspective, it could be preferable to overpay in order to achieve certainty rather than have the uncertainty as to whether the break conditions have been satisfied.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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