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Break notice traps

06 August 2012

If business tenants want the freedom to exercise breaks in order to move elsewhere, they must pay scrupulous attention to the wording of the break clauses in the lease.

Our commercial property team look at some recent cases that highlight potential traps. In the present climate, it would be sensible to assume that landlords will be looking to interpret these clauses in such a way as to prevent a tenant from exercising them.

Break conditions – non-payment

In Avocet Industrial Estates LLP v Merol Ltd , a 10-year lease had a break after five years and the tenant gave notice properly and in time. The break was subject to many conditions but the case turned on two in particular, which the landlord claimed had not been satisfied.

“The tenant has not paid the landlord a sum equal to six months’ annual rent.“

The day before the break date, the tenant hand-delivered to Avocet a letter containing a cheque for the six months’ rent that was due. Avocet argued that this was not good enough – they should have received payment in cleared funds by the break date.

At common law, a creditor must pay debts in legal tender, and a cheque is not currency. But this does not apply where there is express or implied agreement to the contrary – a recognised pattern of previous conduct is enough.

Avocet had always accepted rent payments by cheque. They argued that what is OK for normal rent payments is not acceptable for payment where ‘time is of the essence’. The court could see no distinction and said that payment by cheque was enough.

“Any payment under this lease due to have been paid on or before that date, has not been paid.“

The tenant often paid rent late. The lease allowed for interest to be charged on late payments but Avocet had never demanded it. But now, they calculated the default interest on all previous late payments and argued that it had not been paid by the break date.

The tenant pointed out that since default interest had never been demanded, there was never a time when it was ‘due’. How could they know how much to pay? The judge disagreed. It was as easy for a tenant to work out the interest due as it was for a landlord. The tenant lost the case and could not exercise the break.

Break conditions – vacant possession

“Vacant possession must be given by the date of the break.”

In NYK Logistics (UK) Ltd v Ibrend Estates BV, the lease permitted a break at 3 April on six months’ prior written notice, providing all rent had been paid and vacant possession given.

Valid notice was given by NYK. There was no claim for rent and they had cleared the premises apart from a few items that would have fitted in a small van. It was not until 1 April that a meeting took place at the premises to agree what dilapidations work needed to be done. In the event, it was very little.

Contractors went in and had finished by 9 April. However it was a condition of the break that there would be vacant possession on 3 April. NYK should either have ensured it, or obtained the landlord’s agreement to their staying in to do the work. The court ruled that NYK had failed to exercise the break option correctly.

Break conditions – rent

It’s a common misconception that, when a lease ends between normal payment dates, rent is then payable on a daily basis to the end of the term. In most cases, that is not so. Rent is usually payable by equal quarterly instalments in advance, with each quarter due in full on the relevant date. Dividing it up on a daily basis is possible only if the lease clearly allows it.

“The tenant has paid rents reserved and demanded … up to the termination date and by the termination date”.

In PCE Investors Ltd v Cancer Research UK, the tenant served a break notice to terminate their lease on 11 October 2010. They had received an invoice for rent and service charges of around £66,000. Payment was due on the quarter day of 29 September 2011. As they intended to move out in some 12 days’ time, they paid around £8,500 to cover rent and VAT, calculated on a daily basis up to the break date.

The landlord alleged that they had not complied with the condition to pay the rent demanded, so the break was ineffective. Disallowing the break, the judge explained the logic for requiring a full quarter’s rent in advance, even though the lease might be broken a few days later. Everything rests on the word ‘might’ since nobody knows in advance whether or not the lease, in fact, will end on the date stated in the notice. The only safe course is to pay the whole quarter’s rent in advance. And ideally, the break option should have been so worded as to allow for a pro rata refund after the break date.

Break conditions – arrears

The case of QuirkCo Investments Ltd v Aspray Transport Ltd is a reminder that extras such as insurance premiums are usually classified as ‘rent’.

“Break right is conditional on there being no arrears of any rents at the break date”

The tenant, Aspray, served a valid break notice in March 2010 to terminate their lease of a warehouse on 18 December the same year. The break was subject to a condition that there should be no arrears at the break point.

In November 2010, the landlord invoiced Aspray for insurance of the warehouse, for the year beginning 30 November. Believing they should only have been billed up to the December break date, Aspray offered instead to pay the pro rata sum of £151.50 (although, in fact, they did not pay anything).

Having breached the condition relating to arrears, Aspray would ordinarily have lost the break. However, QuirkCo’s cheque to their insurance broker had gone astray, and a replacement wasn’t banked until January 2011. The judge ruled that the lease allowed the landlord to recover the cost of insurance only if they had already paid it themselves. Judgment was refused. The tenant won this round of the battle but the issue is due to be re-examined at a full court hearing, at which all will depend on the wording of the lease.

As always, if you need commercial and pragmatic legal advice, we’re here to help so please get in touch.

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Alasdair Garbutt LLB (Hons)
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Alasdair Garbutt
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