In the case of Avocet Industrial Estates LLP v Merol
Ltd, a tenant's failure to pay interest of £130
resulted in it being tied-in to a further five years under its
lease as a result of an ineffective break. The judge concluded that
the decision was "harsh" but one that he was obliged to
reach.
The Facts
The tenant had a 10-year lease with an option to break on 17
March 2010. The break option was conditional on the tenant having
paid a one-off amount equivalent to six months' rent and having
settled all sums due under the lease up to the break date.
Under the lease, the tenant was required to pay default interest
on any sums paid late during the term. On several occasions the
tenant failed to pay its rent on time and the landlord had
sometimes (but not always) made demands for default interest.
Seven months before the break date, the tenant served notice to
terminate the lease. The notice stated that the tenant was not
aware of any outstanding sums due under the lease and that the
landlord had not given notice of any breach.
The day before the break date, the tenant sent the landlord a
cheque for six months' rent, together with the keys for the
premises. The covering letter re-iterated that the tenant was not
aware of any outstanding sums due under the lease.
On 7 April 2010, the landlord wrote to the tenant stating that
the tenant had not complied with the break clause because:
the payment of six months' rent had been made by cheque
rather than cleared funds into the landlord's bank account;
and
default interest was payable on late rent payments and had not
been paid.
The tenant argued that payment by cheque was sufficient and that
no interest was due as it had not been formally demanded by the
landlord.
The Decision
The landlord was not entitled to reject payment by cheque. The
general rule is that payments should be made by legal tender (which
a cheque is not). However, this can be varied by the course of
dealings between the parties. In this case, the landlord had
regularly accepted payment by cheque and there was an implied
agreement that the landlord would continue to do so. The payment
made by the tenant was therefore sufficient.
Under the wording of the default interest clause, the landlord
was not required to have formally demanded interest. The liability
to pay interest arose when a payment became overdue and not when a
demand was issued. The tenant had not paid the default interest due
under the lease and had therefore not complied with the conditions
of the break clause. The break was ineffective.
Comment
This is a harsh decision and tenants need to be aware that break
conditions will be interpreted strictly. Tenants should try to
negotiate break conditions that do not require them to be up to
date with payments other than rent (which is the recommended
position under the Code for Leasing Business Premises in England
and Wales 2007).
If this cannot be achieved, tenants should seek to limit their
liability to those payments which have been formally demanded by
the landlord in writing at least seven days before the break
date.
If it is a condition of the break right that all sums due under
the lease have been paid, tenants should carefully check if default
interest may be payable on past arrears and push their landlord for
confirmation as to whether any sums due under the lease are
outstanding.
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.
Specific Questions relating to this article should be addressed directly to the author.
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