Break Options – yet another failed attempt
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First appeared in Informer: Real Estate Newsletter - Spring 2013
The case of Canonical UK v TST Millbank LLC has added to the recent flurry of failed break clause cases. This is no doubt symptomatic of the economic climate in recent years, which has resulted in tenants attempting to offload properties that are financially draining or surplus to requirements whenever possible, and landlords challenging such attempts in order to retain rental income.
The tenant applied to Court for a declaration that it had validly exercised its break option terminating its lease of 27th floor of the Millbank Tower in London. The lease was for 10 years and provided that the tenant had to pay "yearly and proportionately for any part of a year the Yearly Rent… by equal quarterly payments to be made in advance on the usual quarter days". The break clause provided that the tenant could terminate the lease by giving six months' notice, provided (1) the rent was paid up to and including the break date, (2) there was no breach of covenant, and (3) the tenant paid one months’ rent as a reverse premium.
The tenant gave the defendant landlord the requisite six months' notice to terminate the lease on 22 August 2012. In June 2012, it paid the ‘final’ quarter’s rent and service charge in full and vacated the premises on 22 August. It did not, however, expressly pay the one months’ premium (evidently it forgot to do so).
The landlord challenged the break on the basis that the lease had not terminated because the tenant had failed to pay the reverse premium.
In response, the tenant conjured up an argument that the June payment (of the entire quarter’s rent) was sufficient because the wording of the lease actually only required it to pay rent up to the break date - 22 August 2012. Accordingly, payment of the entire quarter (until 28 September) was enough to cover the one month premium as well. In support of its argument, the tenant relied on the words "yearly and proportionately for any part of a year" referred to above.
The issue for the court was therefore whether the tenant was obliged to pay rent for the full quarter on the June quarter day, or whether the tenant was entitled to apportion the rent and only pay rent up to and including the break date. Unfortunately for the tenant, the judge found in favour of the landlord.
In a very similar fashion to the recent case of Quirkco Investments v Aspray Transport, the judge found that the words "yearly and proportionately for any part of a year" only dealt with the position at the beginning and end of the original term of the lease, not when the lease was due to end pursuant to a break notice. As in previous cases, the judge was persuaded that a full quarter’s rent was payable by the fact that in June 2012 it was uncertain whether all the conditions of the break clause would be satisfied (and therefore whether the lease would end). Therefore the obligation on the tenant on the June quarter day was to pay the whole quarter’s rent, not an apportioned amount (which obviously meant the tenant has failed to pay the one month’s premium).
Whilst the tenant has appealed, recent case law strongly indicates that the tenant will have no better luck on appeal.
Key lessons for tenants
- This case is yet another example of the strict approach that the courts have taken to the construction of break clauses. It is similar to the recent case of PCE Investors v Cancer Research UK, in which the court ruled that the tenant was obliged to pay the full quarter's rent that was due on the ‘final’ quarter day even though this was shortly before the break date.
- Tenants must therefore be aware that where rent falls due before a break date, it will usually be payable in full. A tenant who apportions the rent in this situation runs a grave risk that it will invalidate the break.
- Tenants must follow the terms of their lease to the letter if they wish to exercise a break. Whilst this may prove to be expensive in the short term, it will be considerably less so than if the tenant is held to the remainder of the lease.
Lauren King, Senior Associate, Property Litigation Group at Field Fisher Waterhouse LLP