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landlords ignorance is bliss

7 February 2012

Courts consider break clauses again…

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 landlords 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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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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