Author: Janet Keeley
It is relatively common for tenants to negotiate the inclusion of a break provision in a commercial lease, enabling them to terminate the lease early. It is also relatively common for such clauses to provide that the break will only be effective if the tenant has paid all sums due to the landlord by the break date.
That seems a relatively straightforward requirement. However, as the tenant in the recent case of Avocet Industrial Estates LLP v Merol Limited and Tudor Rose International Limited EWHC 3422 (Ch) has found to its cost, that is not necessarily so.
Under the terms of the lease, interest was payable at 4% p.a. above NatWest base rate on any sums which were not duly paid, from the date the payment was due until the date of payment.
The tenant served a break notice, as required, not less than three months before the break date. A covering letter stated that the tenant considered there were no material breaches of the tenant’s covenants. The day before the break date the tenant paid the six months’ rent, which was also necessary for the break to be operative, returned the keys, and confirmed it had vacated the premises. There was some uncertainty about the exact amount to be paid, but the tenant paid the higher amount just to be sure. Further, the landlord held a rent deposit, which was to be released to the tenant on the termination of the lease.
The landlord argued that the tenant had not successfully operated the break because the tenant had failed to pay interest on late payments of rent made at various times during the term. The landlord had on a couple of occasions demanded interest, but this had been at a time when rent was suspended by reason of damage to the property by an insured risk and it had been accepted that interest was not payable on those occasions. It was, however, correct that the tenant had not paid the rent due on the preceding 25 December until 22 January and certain other payments had also been made slightly late.
The landlord had not demanded payment of interest, but the court found that on the true construction of the lease no demand was required. Although the sums involved were very modest, the terms of a break provision are strictly construed and the judge reached the conclusion that he had no alternative but to find that the break provision had not been duly operated and that the lease continued. The judge found as a fact that, if the Landlord had demanded interest, the tenant would have made sure that it was paid in time. However, the judge was also satisfied that the tenant could have calculated what was due without demand and the failure to do so and make payment was the tenant’s downfall. The judge considered that the deposit did not come to the tenant’s aid because it was not technically due to be released until after the lease had been determined, so the tenant could not set off the deposit against the interest due. This is yet another example of the need for tenants to take very great care in operating any conditional break clause. It is essential that all potentially relevant provisions of the lease (and any deeds of variation affecting it) are carefully considered against the facts, to make absolutely certain that the tenant has strictly complied with the requirements of the clause.
Janet Keeley, Partner, Fladgate LLP (firstname.lastname@example.org)