Thursday, 3 May 2012

Lease Break Clauses – Paid In Full

Here’s another recent tale from the courts of how a tenant can get ambushed when trying to exercise a conditional break clause.

The lease in question required rent of £190,000 per annum to be paid by equal quarterly payments in advance on the standard quarter days (25 March, 24 June, 29 September and 25 December) – nothing unusual in that.

The lease contained a break clause allowing the tenant to bring it to an end on 11 October 2010 (“the termination date”) by giving at least 6 months’ prior written notice to its landlord.

One of the conditions of the break clause required payment of the rents reserved and demanded by the lease “up to the termination date”.

The tenant served the break notice.

So how much rent did the tenant have to pay on 29 September 2010?

The tenant argued it only had to pay rent for the period from 29 September 2010 to 11 October 2010.

Sadly for the tenant, that was the wrong answer.

Because the lease contains an obligation to pay a quarter’s rent on each quarter day, the tenant should have paid for the whole quarter on 29 September 2010.

There’s no common law right to apportion the rent if the termination date falls in the middle of a quarter, like it did in this lease; you have to pay the quarter’s rent in full.

This will seem monstrously unfair to many people, because the tenant is paying for a period after the termination date when the lease has ended and it’s left the premises.

Unfair it may be, but it’s the law.

As we’ve seen in other recent cases, getting this wrong can be very expensive.

By apportioning the rent in this case, the tenant was trying to save itself just over £39,000.

Instead, the court found it had not complied with the break clause condition.

As a result, the lease continues until it expires on 27 September 2014, making the tenant liable for the full rent of £190,000 per annum plus all the other associated charges under the lease until the expiry date (and possibly the landlord’s costs of the litigation to boot).

That could amount to more than half a million pounds.

It’s yet another lesson that when seeking to exercise a break right, you must comply strictly with any conditions in the break clause.

What can you do to improve your position when agreeing a new lease?

Ideally, make the break clause unconditional.

However, if there has to be a condition requiring payment of rents reserved by the lease up to the break date, limit it to the principal rent only (to avoid any arguments about service charge for example) and include an obligation for the landlord to reimburse the tenant on the break date for any rent paid for a period after the break date, plus interest if there’s a delay in payment.

You still have to pay the quarter’s rent in full, but at least you’ll be entitled to have some of it paid back to you once the lease has ended.

Here’s a link to previous break clause posts on this blog.

Photo by 401K via flickr

1 comment:

  1. Hi, thanks for interesting article. What can you say about this story? I mean the whole situation