Royal Mail seek advance Break Clause guidance from the Court

January 16, 2015

In light of the recent landlord-friendly rulings on compliance with break clause conditions and final rent payments, it appears that tenants are starting to consider taking pre-emptive action when they are looking to exercise their break clauses.

This is evident through the current case of Royal Mail Group Ltd v Airport Industrial GP Ltd and another in connection with their air mail unit at London Heathrow Airport. In anticipation of their break date of 25 February 2015, Royal Mail have applied to the Court for a number of declarations regarding the precise actions they need to take to ensure they effectively terminate their Lease at the break date and avoid any overpayments that will not be reimbursed.

If a tenant, whether or not inadvertently, fails to comply with the conditions of its break clause then the break notice will be invalid and the lease will not terminate on the break date. The effect of this is that the tenant will continue to be bound by the terms of the lease until the next break date, if there is one, or otherwise until the end of its term.

In the Royal Mail case, the Court has been asked to make the following declarations:

  • Whether vacant possession and reinstatement are conditions of the exercise of the break clause;

  • The amount Royal Mail are required to pay as a condition of the break;

  • When the necessary payment should be made, be it on or in advance of the break date; and

  • Whether the final quarter’s rent must be paid in full despite the fact that the Lease will end on 25 February 2015, if the break clause is successfully exercised, or whether the rent can be apportioned to that date.

Royal Mail seeking of clarification of whether the final quarter’s rent is due in full is a particularly topical issue in light of the ongoing case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Another [2014] where the refusal of the Court to grant Marks and Spencer a refund for rent paid (correctly) for the period after their break date to the end of that quarter, has potentially cost M&S £1.1 million. For a more in depth analysis of this case please click here

However, the M&S story doesn’t end there as the Supreme Court has, somewhat unexpectedly, recently granted M&S permission to appeal. It is therefore possible that the decision will be reversed and a more tenant friendly position taken. Nevertheless, until the Supreme Court has made its decision, the law in relation to reimbursement of final rent payments beyond the break date remains favourable to the landlord. Although the Royal Mail’s pre-emptive actions are unusual, it is possible that this will prompt other tenants conclude that  incurring  legal costs in advance is money well spent if it gives certainty  and avoids the risk and expense of failing to comply with the requirements of a break clause and/or paying rent that they cannot later recover.

The Court has an opportunity to set the record straight with the Royal Mail case and the outcome of the M&S Supreme Court appeal is eagerly awaited. Though the law is currently uncomfortably uncertain and the two upcoming decisions are likely to provide some much needed clarity.

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