UK: A Cautionary Tale Of Two Breaks

Two cases have already been published this year dealing with the issue of a tenant's compliance with conditions to a break. Both cases serve as a reminder to landlords, tenants and their advisers that the rules governing conditional break clauses can sometimes have harsh consequences for tenants.

Tenants and tenants' advisers should take particular care in negotiating the wording of break conditions and landlords and landlords' advisers should be live to issues surrounding the exercise of conditional breaks, especially where property might be difficult to re-let. In particular:

If a lease requires that all sums due under the lease must be paid in order for the break to be effective, the break will not be validly exercised if any sum (no matter how small) is overdue, even where it has not been demanded by the landlord (unless the lease specifically requires only sums demanded must be paid in order to satisfy the break conditions)

Professional advisers must take extreme care with the wording of break clauses – both when negotiating the lease and advising a tenant as to compliance (or advising a landlord whether their tenant has correctly exercised a break)

Where a break date falls between two quarter days and payment of all rent due to the break date is a pre-condition to a break, the full quarter's rent must be paid. There is no guarantee that the tenant will be able to seek a return of a proportion of these sums if the break is validly exercised, so when drafting leases advisers should ensure, where possible, that fixed break dates fall on the days before quarter days

When faced with a conditional break tenants should ask the landlord to confirm what sums are outstanding in advance of the break date. If the landlord does not provide this information it is important for a tenant to write to the landlord confirming that it is their belief that all outstanding sums have been paid. Landlords should avoid assisting the tenant in complying with their break obligations, but should be aware that, if a landlord knows a tenant is mistaken about outstanding sums and takes advantage of this by not correcting the mistake, a tenant can rely on a landlord's silence as a representation that no sums are outstanding under the lease

Avocet Industrial Estates LLP v Merol Limited and another [2011] EWCH 3422 (Ch) (Avocet)

A question of interest

In Avocet, the Court held that a tenant had failed to exercise their break because they had not paid default interest due under the terms of the lease. In this case:

1. The lease provided that the tenant could break the lease on a fixed break date, subject to several conditions (including a break payment of six months' rent payable by the break date). The lease provided that the break would be ineffective if, at the break date, any payment under the lease due to have been paid on or before that date had not been paid.

2. The tenant served a break notice, giving requisite notice under the terms of the lease and stating that they were not aware of any breaches of the terms of the lease.

3. Between the break notice being served and the break date the tenant paid the rent late on three occasions but the landlord did not demand any default interest.

4. When proceedings were subsequently brought to determine the validity of the break, the Court found that the break had not been validly exercised due to the outstanding default interest.

Silence is golden?

The tenant tried to raise an argument, which ultimately failed, that the landlord's failure to mention or demand the default interest might operate as an estoppel, preventing the landlord from arguing that the outstanding default interest invalidated the break. However, an estoppel will only operate in such circumstances where:

The tenant believes that there are no outstanding sums under the lease and informs the landlord of their belief

The landlord knows that there are outstanding sums, knows that the tenant thinks there are none and takes advantage of this mistake by remaining silent

In Avocet the landlord was not aware of the outstanding default interest until after the break so did not know that the tenant's belief was mistaken.

Quirkco Investments Limited v Aspray Transport Limited [2011] EWHC 3060 (Ch) (Quirkco)

No sum due from the tenant

In a summary judgment case, Quirkco, the landlord sought summary judgment in relation to what they claimed was the tenant's ineffective break notice. The lease allowed the tenant to break the lease, but the ability to break was conditional on there being no outstanding sums under the lease and no material breaches of covenant. Under the terms of the lease, the landlord was obliged to insure the premises and the tenant covenanted to reimburse the landlord for the premiums. About a month before the break date, the landlord renewed the insurance premium at a cost of £3,609.72. The landlord sent a demand to the tenant, which was returned with a request that the premium was apportioned until the break date. The landlord reminded the tenant of the break conditions but the tenant did not pay the premium.

In rather unusual circumstances, the landlord's cheque to pay the premium went astray and the premium was actually paid by the landlord's broker, which the landlord subsequently reimbursed. However, the effect of this was that the landlord had not actually paid the premium themselves by the break clause.

The Court held that, on the wording of the lease, because the landlord had not actually expended any money on the insurance premium by the break date, the sums were not due from the landlord so summary judgment could not be given.

No trivial sum

The judge also commented that the sum of £3,609.72 was not sufficiently trivial that the Court would overlook it, neither would a sum which was apportioned as the tenant requested (this would have been some £150). However, the judge was not entirely clear as to whether there could ever be a breach so trivial as to be overlooked by the Court in the case of conditional breaks.

No apportionment

In Quirkco the judge made some very clear comments about whether sums due under a lease should be apportioned where the break date falls between quarter days.

1. Rent payable in advance is not apportionable at common law or under the Apportionment Act 1870.

2. The law of unjust enrichment will not help tenants in these situations as it cannot be used to circumvent contractual liabilities – if the contractual liability to pay arises before the break date then the sum must be paid in full.

3. Wording in a lease which describes rent as payable proportionately for any part of a year will also not assist – this wording deals with commencement and expiry ofa lease.

4. Only clear wording in the break clause itself will be sufficient for any rent payments to be apportioned back to the tenant.

Harsh conditions

The judge in Avocet recognised that this was an extremely harsh result for the tenant and that the pre-conditions even amounted to something of a "trap" for the tenant. However, on the wording of the lease and on the facts of the case, the break would be invalid if any sum, no matter how small, and whether demanded or not, was outstanding at the break date. The judge in Quirkco was less clear about whether there could ever be a breach so trivial, in the case of a conditional break, where the Court would simply overlook it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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