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More problems with break clauses

01 Feb 2012

A case heard by the High Court at the end of last year will send shivers down the spines of any tenant looking to exercise a break clause in their lease of commercial premises.  The law on this area is complex enough, but the court has just taken things to another stage.

It is well accepted that the provisions relating to break clauses need to be strictly adhered to by tenants if they are successfully to terminate their leases early. This applies particularly to any precondition that needs to be satisfied on or before the break date. Some break clauses require absolute compliance; others merely require compliance in all material respects or are qualified by a reasonableness test. A precondition that must be adhered to absolutely means just that – a breach of the tenant covenant, however trivial, can defeat the exercise of the break provisions.

The Code for Leasing Business Premises in England and Wales 2007 recommends that preconditions should be restricted to payment of the principal rent being up to date, that vacant possession of the property be given to the landlord and that any underleases or subleases be terminated. Leases granted before the Code was issued will often contain more stringent preconditions, and as will many leases granted since the Code was issued. Such preconditions may require payment of all monies due under the lease – not just the principal rent – or compliance by the tenant with other covenants in the lease, such as those covering repairs, decoration or alterations.

The case concerned is Avocet Industrial Estates LLP v Merol and another. The lease of the tenant’s commercial premises was drawn in conventional terms, which included a tenant’s option to break the lease on at least six months prior written notice but subject to the tenant, amongst other things, having paid on or before the break date any sums due under the lease.

The lease contained, as do virtually all leases, a provision requiring the tenant to pay interest to the landlord on any payment due under the lease that is late.

When the tenant served its break notice, it advised the landlord that it was not aware of any breaches of covenant on its part. The landlord made no substantive rely to the tenant’s break notice. The tenant made sure that the principal rent was up to date by the break date, he had returned the keys of the property and had vacated by the break date.

Imagine the tenant’s surprise when informed by the landlord some three weeks after the break date that the lease was still subsisting and that the tenant had not properly terminated the lease. The landlord’s claim was based upon the fact that during the six month notice period, the tenant had been late in paying its rent a couple of occasions. The late payment entitled the landlord to claim interest for late payment, although it did not in fact do so. 

The vital precondition concerned the payment of all monies due under the lease, not just those due and demanded. Provided that the landlord did not do or say anything to the tenant which could be construed by the tenant as an admission that payment of default interest was waived, the landlord was entitled to claim that not all monies due under the lease had been paid by the tenant by the break date.

As the judge acknowledged, this was a harsh decision and that such clauses were traps for tenants. All the more reason to take legal advice early before exercising an break clause.

For further information, please contact Richard Freeman-Wallace on 0191 232 8345 or email richard.freeman-wallace@hay-kilner.co.uk.