High Court case highlights for property tenants the potential for error in conditional break clauses

January 30, 2012

A stark reminder of the potential for error in the exercise of conditional break clauses, and how strictly they are interpreted, has recently been flagged by the outcome of a High Court case against a tenant. 

Facts of the case (Avocet Industrial Estates LLP v Merol and another [2011] EWHC 3422 (Ch))

The tenant had sought to exercise its break option on the date specified in its lease and was aware of the various conditions that applied.  These included the payment of a sum equal to six months’ rent to the landlord on or before the break date and also ensuring that all sums due under the lease on or before that date had been paid. 

When the break notice was served the tenant stated in the covering letter that it was not aware of any breach of the lease (for example, a non-payment of rent) and, given that the landlord had just sent the tenant a cheque for 6 months’ interest on the rent deposit held by it in connection with the tenancy, which it was entitled to withhold in the event of a breach of the lease it seemed that there was no intention to draw on the deposit. During the course of the lease the tenant had paid its rent by cheque and so presented a cheque to the landlord for the six month rent payment when it vacated the premises and returned the keys on the break date. 

A few weeks later the landlord wrote to the tenant stating that the break clause had not been validly complied with because;

·         Cleared funds were required by the break date and so a cheque was not sufficient; and

·         Rent and other sums due under the lease had been paid late on various occasions during the course of the lease and so the default interest due on those late payments was still owing, even though no demand had been made. 

Court decision

·         Payment by cheque was ruled not to be a breach of condition of the break clause by the tenant. Throughout the lease landlord had consistently accepted cheques from the tenant as payment of rent and so the Court held that due to the course of dealings between them an implied agreement was in place.

·         However, the Court said that the tenant did owe the landlord interest on the late rent payments.  The lease had not required that only interest that had been demanded was payable and so the tenant’s non-payment was a breach of the lease.  Therefore the break clause was ineffective.

The judge commented that the outcome of this case was a “harsh one” for the tenant, but that break clauses must be strictly complied with based on the wording of an individual lease.  Tenants must be sure that they have complied with and settled each and every one of their  obligations under a lease in order to  comply with the break conditions and in order to avoid any possibility of a landlord arguing that the break option has not been validly exercised and the potentially disastrous consequences.

This case highlights yet again the need for careful and rigorous negotiation of break clauses, often with very reluctant landlords to avoid being caught out. 

The current industry code of practice, The Code for Leasing Business Premises in England and Wales 2007, recommends that any condition as to rent should only require that the basis rent is paid up to date.   A limitation in the break clause in this instance so as to capture only sums demanded by the landlord in writing may very well have protected the tenant however our advice in all cases is to avoid any conditions on break clauses whatsoever wherever possible.

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