Break clauses - avoiding management headaches

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Disputes involving break clauses have increased - an inevitable consequence of current economic and market conditions.  A ‘thumbnail sketch’ of some of the points arising in recent cases may help you navigate your way through a lease break.

Some principles are well established:

• conditions attaching to the exercise of a break right must be strictly complied with;

• service of notice to break a lease must comply with the terms of the lease and any other legal requirements.

Default interest - when is it due? 

If, as is usual, the lease entitles the landlord to default interest on late payments, check the lease terms.  They may not require the landlord to demand default interest for it to become due and payable (assuming any grace period has expired). 

Even if no demand is required, where the break clause requires absolute compliance (i.e. that all sums due under the lease are to be paid) then failure to pay outstanding default interest, even if not demanded, may deny the tenant its break right. However, other matters may complicate that analysis (e.g. the conduct of the landlord).

(Avocet Industrial Estates LLP v Merol Ltd and Another [2011])

Payment by cheque

If payment conditions attach to a tenant’s break right, check whether the lease is clear on what payment means in this context (e.g. cleared funds).  If there has been a course of dealings between landlord and tenant whereby the tenant paid by cheque (even though this does not provide cleared funds), and this has been accepted by the landlord, that may be enough to prevent the landlord from rejecting payment by cheque as a valid payment method to break the lease (where the cheque subsequently cleared on presentation).

(Avocet Industrial Estates LLP v Merol Ltd and Another [2011])

Insurance rent - when is it payable? 

Where a break clause imposes an absolute obligation on the tenant (e.g. to pay all sums due under the lease to break its lease on the break date), that will include insurance and other rents. 

If the landlord makes demand for insurance rent, when it had not at that point paid the insurer the premium due, then failure to pay that demand may not stop the tenant from validly breaking its lease - whether or not it can will depend on the lease

Rent - can the tenant pay an apportioned amount only? 

Where a break clause imposes an absolute obligation on the tenant (e.g. to pay all sums due under the lease to break its lease on the break date), that will include insurance and other rents. 

Unless the terms of the break right permit the tenant to pay an apportioned amount (e.g. up to the break date and not the next payment date) then the tenant must pay the full amount payable, to comply with an obligation to pay all sums due under the lease, to exercise the break right.  Reimbursement may be due to the tenant, for the period following termination of the lease. 

(Quirkco Investments Limited v Aspray Transport Ltd [2011])

Vacant possession (VP) - workmen on site 

Permitting access for tradesmen to deal with repairs following the break date, maintaining a security guard and failing to surrender the keys may be sufficient to mean the tenant has not given VP.

(NYK Logistics (UK) Ltd v Ibrend Estates BV [2011])

Vacant possession - onsite security 

A security guard left on site, even in an area known for vandalism, may mean that the tenant has not given VP, where the landlord has not previously agreed to that arrangement, the tenant had not surrendered the keys, and the landlord’s agent is not able to obtain unimpeded access.

(NYK Logistics (UK) Ltd v Ibrend Estates BV [2011])

 

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