11 March 2013 #Commercial Real Estate
Compliance with conditions in break clauses continues to be a difficult area which provides much work for litigators and in which there are frequent new Court decisions.
The issue of compliance with break clause conditions is one which never goes away but is particularly relevant now when nearly all commercial leases granted since the downturn in the market contain break clauses. Clearly, there are benefits to tenants in being able to secure premises with an option to terminate early, and there are obvious disadvantages to landlords in agreeing to such terms.
The starting point for any consideration of a break clause is that the Court will always construe the terms of the break clause and compliance with them strictly against the tenant who is seeking to exercise the break. Since there is no single set of standard wording for break clauses, every break clause needs to be assessed on its own terms and acted upon accordingly.
Among the most onerous break conditions to be imposed is the requirement for material compliance with covenants. This topic is outside the scope of this article. Suffice to say that any tenant should make certain that this is never agreed to in any break clause being negotiated prior to a lease being granted.
Other break conditions which are generally regarded as acceptable are those requiring the tenant to yield the premises to the landlord with vacant possession and to pay the rents and other sums due under the lease.
The case of Avocet Industrial Estates LLP v Merol Limited (2011) related to a break clause which had been exercised, which had a number of conditions. The following two conditions were relevant and the lease read as follows:
“A break notice shall be of no effect if:... at the Break Date any payment under this lease due to have been paid on or before that date, has not been paid, or... at the Break Date the Tenant has not paid to the Landlord a sum equal to 6 months’ Annual Rent”.
The payment of 6 months’ rent was effected by delivery of a cheque for the 6 months’ rent from the tenant’s solicitors on the day before the break date. The landlord claimed that payment by cheque was not good enough. It claimed that it should have received payment in cleared funds by the break date.
It is a principal of law that a creditor must pay its debts in legal tender and a cheque does not qualify. However, that rule can be displaced by an express or implied agreement to the contrary. A past course of dealing will be enough and, in this case, the landlord had always accepted the payment of rent by cheque and had never objected. Had this not been the case, the condition would not have been fulfilled by the delivery of a cheque.
The second condition relating to other payments not being made turned out to be fatal for the tenant seeking to exercise the break in this case. The lease required the payment of interest when rent was paid late. The tenant commonly paid its rent late and, therefore, interest had accrued, although it had not been demanded by the landlord. The landlord was successfully able to contend that the tenant ought to have worked out what the amount of the interest was (as it is only a matter of fact based upon the payment dates and the relevant interest rate) and accordingly the tenant had not complied with the break condition. The judge estimated that the default interest by the break date was around £130. That was enough to prevent the break clause being exercised properly.
It is usual, when negotiating break clauses, to insist that any sums due under the lease must have been demanded, except for the annual rent. It is better to go further than this and to insist that the payments must have been demanded no later than 7 days before the break date, to make absolutely certain that the landlord does not make a demand at the last minute with the effect of negating the tenant’s exercise of the break clause.
In the case of PCE Investors v Cancer Research UK (2012), the case turned on the exercise of a break where the tenant had only paid the sum of rent calculated from the previous rent payment up until the date of the break. The lease provided that the tenant “must have paid the rents reserved and demanded by this Lease up to the Termination Date”.
The question was whether the break clause required a full quarter’s rent to be paid once the break notice had been given or only rent up to the break date. The tenant sent an email to the managing agent for the premises prior to the break date stating that a payment had been made for the outstanding rent for the premises in the sum calculated only up to the break date and not beyond, and requested confirmation that that was the correct amount. The tenant argued that the managing agent, in failing to reply to that email, meant that the landlord was estopped from relying on the tenant’s payment of too little rent. Although an estoppel can arise by silence, the judge in this case said that the landlord had not been silent. Its managing agent had demanded a full quarter’s rent. There was no obligation on the landlord, having demanded a full quarter’s rent, to repeat their demand just because the tenant had paid too little.
The Court decided that the break was ineffective. However unfair it seems for a tenant to have to pay almost a full quarter’s rent in order to exercise its break, unless the break clause explicitly states that the payment does not need to cover any period beyond the break date, it is normal practice for the full amount to be paid and this cannot be reclaimed from the landlord as of right.
It is now more common to insert provisions into leases where we are acting for tenants providing that any rent paid in respect of a period following the break date is to be refunded by the landlord after the successful exercise of the break . It is understandable that landlords will want to collect the full quarter’s rent, given that compliance in the break clause is by no means certain and the lease may carry on and the landlord is, therefore, entitled to receive the full amount of money as if the lease were carrying on.
The third and final case is a case of NYK Logistics (UK) Limited v Ibrend Estates BV (2011). This case concerns vacant possession of premises which was a requirement of the tenant’s break clause. The tenant had cleared everything out, apart from a few items that would easily have fitted in a small van. However, it was not until 2 days prior to the break date that a meeting took place at the premises to agree what works the parties were to agree that the tenant should carry out. These works were not very significant and the tenant’s workmen went in 2 days after the break date to carry out the works, which they finished 5 days later. The landlord was aware that the tenant’s workmen were in the premises.
The landlord claimed that the tenant had not given up vacant possession. At first instance and in the Court of Appeal, the decision went against the tenant. The tenant had not yielded up vacant possession on the break date because they were still in the premises carrying out the works. There were some indication given in the judgment that the fact that the tenant left a few items in the premises on the break date that would easily have fitted into a small van, would not have been a sufficient reason for the exercise of the break to be ineffective.
It is often not easy for tenants dealing with conditional break clauses but with the correct advice and early action, it should be possible for most, if not all, break clauses to be successfully exercised.
For further advice on break clauses and their exercise, please contact the author, Richard Higgs, Partner in our Real Estate Team or Antony Morris, Partner in our Disputes Resolution Team.