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Tenants' break options: recent case law provides more banana skins for tenants to slip up on
Tenants have, for many years, had to take great care when seeking to operate break clauses/options within leases (perhaps sometimes more appropriately called 'opportunities to break').
This has mainly been because:
- break options usually contain a number of pre-conditions;
- tenants often have to comply with strict pre-conditions for the option to be effective; and
- landlords, when faced with the possibility of having to re-let premises, will often do all they can to keep the existing tenant - especially 'in these economic times….'.
On the whole, landlords have been pretty successful at frustrating tenants' attempts to break their lease. Case law provides numerous 'hard luck' stories, where tenants have unsuccessfully sought to bring their leases to an early end. Readers may be familiar with examples concerning the validity of the break notice itself, or compliance with pre-conditions relating to the state of repair of the property.
Two recent cases highlight another source of potential banana skins for tenants to slip up on – payment of sums due under the lease. The first case had a happy ending for the tenant and the other…less so. Both reinforce the message that tenants need to manage the break option process very carefully in order to avoid potential pitfalls.
Quirkco Investments v Aspray (2011) involved a tenant seeking to exercise a break option. One of the pre-conditions for operating the break option was that the tenant owed no outstanding sums which were due under the lease at the break date.
After the break date, the landlord challenged the break option on the grounds that the tenant had not paid the insurance rent. This had been demanded a month before the break date (but for the entire forthcoming year). If that sum was due, the tenant's failure to pay it would undoubtedly amount to a breach of the condition to pay the sums due and thereby invalidate the break (however harsh that might seem). However, luckily for the tenant, the wording of the clause in question only obliged the tenant to pay insurance rent after it had been incurred by the landlord. As luck would have it, the landlord's cheque for the insurance rent went astray in the post. At the relevant time, therefore, the amount remained unpaid. As the sum had not been paid, it had not been "incurred" and the tenant was saved.
Had the clause instead required payment 'on demand' (which is fairly standard), or if the payment had reached the insurers, the tenant would have been locked into the lease for the remainder of the term. As break options are strictly construed, the position really is as stark as that.
The tenant in the second case, Avocet v Merol (2011), was not so lucky.
The break option in this case was also conditional on payment of sums due under the lease at the break date. The tenant was clearly aware that the break option needed to be managed carefully and took great care in trying to comply with the conditions of the break. The tenant paid a six month penalty payment and carefully checked that it had paid all of the sums which the landlord had demanded.
Some three weeks after the break date (well after the tenant had moved out), the tenant was therefore surprised to receive a letter from the landlord stating that the lease had not been broken because (amongst other things) the tenant had failed to pay default interest on late payments under the lease.
The tenant was quick to highlight that no default interest had been demanded, and so how was it to know that interest was due? However, the Court had to interpret the wording of the lease in question. It held that in this case, the lease provided that no demand was necessary before interest became due (and that the tenant could have worked out the amount itself). It followed that because the tenant had not paid the sum, the break option was not validly exercised and the lease continued.
How much interest was due? Only £130! On top of that, the landlord held a rent deposit of £20,000 (and had relatively recently paid interest accrued on that deposit to the tenant). Once again, as break options are strictly construed, it did not matter that the amount was a paltry one, and the lease continued.
Summary
These cases provide two examples of how payment of sums due under the lease (both of relatively insignificant amounts) assumed a very great importance. Depending on the terms of any particular break option (and the other terms of the lease), pre-conditions to pay 'all sums due under the lease' can be deceptively complicated.
There is far less chance of slipping on these kinds of banana skins if the break option is not conditional on the payment of any monies at all. However, if this is not negotiable, far better for the break to only be conditional on payment of principal rent or those sums demanded at least 7 or 14 days before the break date.
STOP PRESS:
Since we went to press, there have been two more cases showing quite how tricky break clauses can be and how often disputes arise:
In the case of Intergraph (UK) Ltd v Wolfson Microelectronics, the tenant was caught out firstly by not reading the break clause properly, and then by failing to make a payment on time.
The tenant, T, had 2 leases with linked break rights. However T only served notice to break one lease. An alternative was for T to make both units self contained again, and to break one lease only. There was very little time to do this, in fact only a couple of weeks.
As a compromise, T offered to make a payment to L in lieu of the works and reinstatement. L agreed to this, as long as everything was paid by 28 February. T paid the rent on time, but not the reinstatement money. T found out about the mistake the very next day and tried to pay. L said the payments had not been made in time, so the break was ineffective. The court agreed, saying that the break was ineffective and that time was "of the essence" as regards paying on time.
Early in April, in the case of PCE Investors Limited v Cancer Research UK, T was caught out by only paying rent up to the break date, instead of up to the end of the quarter, even though the break date fell part way through the quarter. It serves as a reminder that a pre-condition within a break to pay the rents due requires payment of the entire final quarter's rent and there is no general right to apportion that amount up to the break date only.
The break took effect in October. L's agent sent T an invoice for the full September quarter's rent. On 24th September, T sent L's agent an e-mail stating that T had paid the rent due from 29 September 2010 to the break date, and asking L to confirm that this sum was correct. L did not respond.
Just after the break date, L's solicitors informed T that it should have paid the September quarter's rent in full, and that therefore the break clause in the lease had not been validly exercised.
The High Court held that T had failed to terminate the lease a full quarter's rent fell due on the September quarter day. It was payable in advance, and on the due date it could not be certain that the lease would terminate on the break date, as T might not comply with the other elements of the break clause. An argument that L was estopped from relying on this was roundly rejected.
It has always been our advice that, save in extremely clear cases, it is best for a tenant to pay the full rent and any other sums due, to ensure that a break right is effectively exercised and not seek to apportion these amounts to the break date. Whilst many leases contain no right to a refund, if a tenant does wish to make an attempt to recover any sums paid, it should wait until the lease has been properly terminated.
Christopher Hill, Associate and Lauren King, Associate in the Property Litigation Group at Field Fisher Waterhouse LLP