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If anything case law makes life progressively more difficult for tenants, just as wishing to exercise break rights, given the current economic climate, becomes more likely.

In Avocet Industrial Estates LLP v Merol Ltd and Tudor Rose International Ltd [2011] (judgment 19 December 2011) before Morgan J in the Chancery Division, the tenant served a break notice, pursuant to a lease which provided that the break would be of no effect if at the break date any payment due on or before it had not been made.  When serving the break notice the tenant advised the landlord it was not aware of any breaches of covenant. 

A break “penalty” of a sum equivalent to six months rent had to be made before the break date.  The tenant hand delivered a letter to the landlord the day before the break date, enclosing a cheque for the “penalty”, again saying that it was not aware of any breaches of covenant. After the break date had passed the landlord denied effectiveness of the break, saying that the penalty was not in cleared funds, as at the break date, and also that the tenant was required to pay, and had not paid, interest on rent and service charge payments which had been made late previously during the term (even though such interest had never been demanded).

Taking these arguments in turn it was held:-

1. A cheque is not legal tender, so delivery of it to the landlord per se did not satisfy the “penalty” payment break condition (although presumably if it had been accepted and cleared before the break date that would have done so however).  In this case though, in the first three years of the term the tenant had paid, and the landlord had accepted, cheques for the rent, before a switch to payment by BACS.  The landlord had not however at any time said it would not subsequently accept payment by cheque, and a continued agreement to accept cheque payment could therefore be implied.  This unfortunately did the tenant no good however …
2. The lease specified that if any rent or other money under the lease was not paid on the due date the tenant should pay default interest from the due date until payment was received.  There had been occasions of a late payment, but payment of consequent penalty interest had never been demanded.  It was held that there was nothing in the lease to say that it needed to be demanded before being due, and that the tenant knew when payments were made late and could have worked out and tendered the applicable penalty interest.  The tenant argued that the landlord was stopped from relying on non-payment of non-demanded interest because it had paid out interest on a rent deposit, which it was not obliged to do if the tenant was in default.  Morgan J considered the critical question to be whether the landlord knew, before the break date, that the tenant’s belief as stated in the tenant’s letters that there were no subsisting defaults was wrong.  On the evidence the landlord had not even thought about it, until after the break date had passed, and that was enough to kill the tenant’s argument.  The break was held to  ail.

The judge admitted that the combined effect of the interest clause and the break clause created a trap for the tenant; for the sake of about £130 the tenant was stuck with a continuing lease of premises it did not want.

 There is a chink of light for tenants here though – for the first time a court has contemplated the possibility of a landlord who knows that the tenant has made a mistake causing failure to comply with break right conditions not being allowed to take advantage of it to deny the tenant’s break entitlement, on application of estoppel principles. 

Mark Kendrick
Partner

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.