Both landlords and tenants are aware of the potentially draconian implications of a tenant's inability to comply with break clause conditions contained in a lease. These days it is generally accepted practice that only conditions which are in the tenant's control (for example payment of rent and returning the property to the landlord vacant) are considered reasonable pre-conditions to the exercise of break rights. These conditions are set out in the Code for Leasing Business Premises in England and Wales 2007.

Many non-code compliant break clauses require tenants to be up to date with all payments not just the main rent. Tenants should always ensure that the obligation is linked only to payments that the landlord has demanded in writing at least 7 days before the break date. In the case of Avocet Industrial Estates LLP -v- Merol Limited the High Court held that a tenant who owed default interest on late payments under a Lease was in breach of the terms of its break clause even though the landlord had not claimed the default interest and the amount of interest was negligible. In concluding, the judge commented that the result was "harsh" and that conditions attached to break rights represent "something of a trap for a tenant".

In the circumstances of the case:-

• Rent was paid late.
• Default interest was due from the date on which payment should have been made until the date payment was actually made. It was not demanded.
• There was nothing in the Lease clause wording to suggest that there was a pre-condition that the landlord must first serve on the tenant a demand for interest
• The tenant believed it had paid all sums due and the landlord knew of that belief because the tenant had told the landlord this. If the landlord had told the tenant that the tenant owed default interest then the tenant would, in all likelihood, have paid it to avoid an argument about his ability to determine the Lease under the break right

The High Court concluded, however, that the landlord did not know the tenant's belief was wrong before the end of the break date and that the landlord had not taken advantage of the tenant's mistake. The landlord was therefore not prevented from denying the validity of the break right by having "said nothing" until it was too late for the tenant to serve a fresh break notice.

The lesson is clear:

When exercising a break right in an existing Lease all tenants (and landlords) should carefully check the conditions applicable to the exercise of the break. This case highlights the need to establish whether default interest may be due on past arrears. A tenant may not know precisely how much default interest is due without having received a demand. Where there has been a late payment, then in such a circumstance the tenant would need to estimate the payment due and err on the safe side. The cost of doing so is likely to be far less than the cost of remaining bound under the Lease…

If you require any further advice or assistance please contact Jane Winfield or a member of the Property team at Wortley Byers on 01277 268314 or jwinfield@wortleybyers.co.uk.

March 2012

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