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Thursday, 24 January 2013

Lease Break Clauses – 10 Golden Rules

Last year saw some significant cases on break clauses.

The courts will tend to side with the landlord if the tenant hasn't complied strictly with the wording of a break clause.

Jonathan Seitler QC of Wilberforce Chambers writes a very interesting article in the Estates Gazette 12 January 2013 (£) in which he distils the lessons learned from recent cases into 10 rules summarising the current position left to us by those judgments.

1.     "There is no breach of the lease too small, too technical or too unfair on the tenant that it will not lose the tenant its right to break if the break is conditional on full compliance with tenant’s covenants."

2.   "The same goes for requirements under a lease that the break clause is served at a particular address, by a particular person, on a particular person, or by a particular mode of service. Every single word of the break clause relating to service must be strictly complied with."

3.   "Likewise for requirements under a lease that the break clause is to be served or payments are to be made or covenants are to be complied with or vacant possession is to be given, by a certain time or before a certain date."

4.     "The only reliable exception to the first rule occurs when the break clause is expressly conditional only on “substantial” or “material” compliance with tenant’s covenants."

5.     "The landlord’s motive for trying to defeat the break is irrelevant."

6.     "The presence in the lease of a liability to pay money “whether demanded or not” means that it will be the tenant who will have to calculate and pay the amount owing, if the break clause is conditional on all sums due under the lease having been paid."

7.     "Small errors in the wording of the break notice will not necessarily render it ineffective if the reasonable recipient would nevertheless be able correctly to ascertain what the tenant meant to write."

8.     "A tenant who believes that is has complied with the conditions attached to the break should tell its landlord of that belief and ask the landlord to confirm whether it agrees, and if not, why not."

9.     "Where the giving of VP is a condition of the break clause, strict compliance with the condition does not mean that the tenant has to leave the premises 100% pristine to satisfy the condition."

10.   "The workings of the above rules will always be subject to modification depending on the terms of the lease."

He concludes: "There are very few leases that will not provide ample opportunity for lucrative gain or catastrophic loss, if you are prepared to look at them long and hard enough."

There's more reasoning given in the article to explain the background to each rule further - well worth a read.

Some of the recent cases will be subject to appeal in 2013 and it will be interesting to see how any further arguments play out.

Will this continue to be an area of landlord and tenant law where pedantry outweighs commercial common sense?

UPDATE: There's a piece by me on break clauses in the February edition of the Property Law Journal (£).

Photo by doodlehedz via Flickr

Monday, 7 January 2013

Lease Break Clauses: Avoiding the Rental Cliff

The New Year might have begun with one fiscal cliff avoided (for now maybe) but for one tenant the Old Year appeared to end in free-fall (pending the outcome of an appeal).

The latest* in a long line of cautionary break clause tales to hit the courts, reported by Cripps Harries Hall on their blog, concerns a tenant in Millbank Tower.

The break clause allowed the tenant to break the lease provided it satisfied various conditions including paying the rent up to and including the break date and paying one month's yearly rent as a reverse premium. 

In February 2012 the tenant served notice to terminate the lease on 22 August 2012. 

In June 2012, it paid a full quarter's rent and the quarterly service charge in advance (the June quarter runs from 24 June to 28 September (inclusive).

In September 2012, the landlord claimed that because the tenant had not also paid an amount equal to one month's rent as a reverse premium the break notice was ineffective. 

The tenant claimed that the payment it had made included two months' rent up to and including the break date, and the one month reverse premium.

The court ruled in favour of the landlord, saying a full quarter's rent had to be paid plus the reverse premium of one month's rent.

Unless it succeeds on appeal, the tenant will apparently be liable for rent of almost £1.5 million over the next four years. 

I can't comment on the particular facts of the case or the wording of the lease as I've not seen a full report, and anyway it's being appealed so we'll have to wait and see what arguments the tenant makes when the case is fully reported.

As a general point though, we have seen before that unless the lease specifically provides otherwise, there is no general common law right to apportion rent.

So, as a tenant, if your rent is paid quarterly, the break date falls within a quarter, and the lease requires you to pay rent up to the break date, you should pay the quarter's rent in full when it becomes due.

Any arguments over whether you should be reimbursed for the time you've paid for which falls after the break date are best left until after the lease has been successfully terminated.

Even though it might seem expensive to do so at the time, you must follow your lease terms to the letter if you wish to exercise a break, as the amount in question is likely to be far less than the cost of remaining the tenant of property you wanted to leave behind.

The appeal in this latest case is expected to be heard in February 2013 [Update 6/3/13 - the case was settled out of court.]

*Canonical UK Ltd v TST Millbank LLC

Photo by marcella bona via flickr