Payment dates – miss them at your peril!

21 September 2017

Two cases have recently received judgments which highlight the importance of ensuring both landlords and tenants in the hotel and leisure industries diarise important dates from legal documents, especially those which involve payments. It seems obvious on the face of it that dates such as rent payment dates in leases will be met. Yet in practice, it happens more often that one would expect that after completion, dates are not recorded and landlords and tenants miss deadlines. The consequences can be disastrous.

The first case is Vivienne Westwood Ltd v Conduit Street Development Ltd [2017] EWHC 350 (Ch).

The claimant tenant asked the court to determine the effect of a side letter which it had entered into with the defendant landlord. The tenant leased retail premises from the landlord for a term of 15 years from November 2009, at an initial rent of £110,000 per annum, subject to open market rent reviews in the fifth and tenth years. The side letter was entered into at the same time as the lease. Under its terms, the landlord agreed to accept a lower rate of rent from the tenant, increasing gradually from £90,000 for the first year to £100,000 for the fifth year. It would then be capped at £125,000 per annum for the following five years if a higher open market rent was determined upon the first rent review.

The lower rent set out in the side letter was terminable by the landlord if the tenant breached any of the terms and conditions of the side letter or lease, in which case the rents would be payable in the manner set out in the lease, as if the side letter had never existed. The tenant failed to pay the rent in June 2015 and the landlord asserted that the side letter had been terminated and that the open market rent was payable.

The issue was whether the terms of the side letter amounted to a penalty and were therefore unenforceable. It was determined that the termination provision would also be penal in nature and therefore the side letter was unenforceable. The reasons behind this judgment are not relevant for the purposes of this article. The key point here is that the trigger for the legal proceedings was that a rent payment had not been made.

The second case is General Motors UK Ltd v Manchester Ship Canal Co Ltd [2017] EWHC 21 (Ch).

In 1962 The Manchester Ship Canal Company Limited (MSC) granted General Motors UK Limited (GM) a licence, in perpetuity, to discharge surface water from GM’s main manufacturing plant at Ellesmere Port into the Manchester Ship Canal. The licence reserved an annual fee of £50 and a right for MSC to terminate in the event of non-payment. Due to an oversight, GM failed to make the 2013 payment of the licence fee, despite being requested and reminded to pay and, after some correspondence, MSC terminated the licence on 10 March 2014. The parties subsequently tried to negotiate a new licence but without success. It was clear that MSC was seeking a significantly increased licence fee, in the region of £450,000, for any new arrangement! Following advice from external counsel, GM brought a claim seeking (among other things) relief from forfeiture (i.e. for the court to exercise its equitable jurisdiction to reinstate the licence although it had been validly terminated). Whether relief from forfeiture was an appropriate remedy or not depended on whether the licence was in fact a lease. As with the case above, the trigger to these proceedings was that GM had missed the payment date for the licence fee. To exacerbate its loss, GM was ordered to pay the MSC’s costs on an indemnity basis.

Although the disputes in both cases involved different legal arguments, they are similar in that it was an administrative error which led to legal proceedings. For landlords, it is vital that they either manage their properties themselves or employ managing agents to do so for them. The impact of going through court proceedings is not only time-consuming and costly but can also lead to reputational damage.

For tenants, it is their responsibility to ensure payments due under leases and other documents are met on time. If not, the financial implications can be extremely damaging and even if court proceedings are won, the time taken to proceed with them can be costly too.

So often it is basic administrative errors which can cause the most damage. Do not be caught out!