BREAKING UP IS NEVER EASY… (Break clauses)

08 May 2013

When entering into a lease, although important, the break clause is not usually the main focus of negotiations. However, it should be given more consideration, given the particularly strict stance the Courts now adopt when interpreting break clauses. These decisions should encourage landlords and tenants alike to closely examine their leases and consider any conditions which may affect their right to break, especially if they are considering exercising such a right.

The 2011 case of Avocet Industrial Estates LLP v Merol Ltd is a key example. Here the High Court ruled that the break notice given by the tenant was invalid because the tenant had failed to pay £130 of interest due on historic rent arrears. The break clause stated that the break notice would be of no effect where any payment due under the lease was outstanding at the break date. The Court held that the interest due (even when it accrued by default) on the rent arrears amounted to an outstanding payment under the lease. This is despite the fact that the landlord had never demanded payment of the interest. One might assume that as no demand for payment was made the landlord had acquiesced on the interest, but this was not the case. The Court found that the clause did not specify that a demand for payment of the default interest must be made before the tenant's liability arose and therefore the amount remained outstanding.

The tenant appealed this decision to the Court of Appeal, but the parties came to an agreement on the first day of the appeal hearing and therefore the High Court judgment remains good law.

The 2012 case of Canonical UK Ltd v TST Millbank LLC is another recent judgment in which the High Court found in favour of the landlord and held the tenant's break notice to be invalid. Here the break clause stipulated that the tenant must:

  1. give six months' notice to terminate;
  2. pay the rent up to and including the break date; and
  3. pay one month's rent by way of a reverse premium.

The tenant gave the necessary six months' notice and on the June quarter day paid three months' rent as well as the service charge due. The break date was 22 August 2012 and the premises were vacated on the same day. The landlord claimed that the break was ineffective because the reverse premium was not paid, the tenant argued that the rent paid on the June quarter day should be apportioned as two months' rent and one month's reverse premium. The Court decided that the tenant's payment on the June quarter day was in respect of the landlord's invoice for the rent and service charge due for that quarter and it was not intended to be a reverse premium. Therefore, the break conditions had not been satisfied and the landlord obtained a declaration that the lease had not been terminated.

Landlords do not want to be left with empty premises and this is particularly true in the current climate, so they are now more likely to challenge a tenant's break notice. Recent decisions illustrate that the Courts will implement a very strict approach to interpreting break clauses and tenants must fully comply with any conditions. Although these decisions may appear draconian, such strict interpretation is designed to provide commercial certainty for all parties to a lease.

Tenants contemplating the exercise of their break rights should take professional advice before doing so. Ensuring that all conditions for the break have been complied with and all payments due and owing have been made prior to the break date are essential as the alternative is a continuing unwanted lease liability and/or expensive litigation. Similarly, if a landlord is served with a break notice, legal advice should be sought before responding to the tenant. Premature acceptance or acknowledgment of the break will weaken the landlord's position going forward if there are grounds to resist the exercise of the tenant's break.

Breaking up is certainly not as easy as it once was.

For further information, please contact:

Julianne Treacy, Associate

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