In the current economic climate break clauses are proving fertile territory for disputes, tenants are relying on them to escape leases entered into when times were better and landlords are challenging their exercise to try and keep tenants locked into leases.
In a previous article the pitfalls for a tenant exercising a break clause were discussed, but in a recent case it was the landlord claiming that the break was ineffective who was under the spotlight.
In Quirkco Investments Limited v Aspray Transport Limited  Aspray argued that it had terminated its lease with Quirkco by serving a notice pursuant to a break clause in the lease. Quirkco asserted that the notice was ineffective because Aspray was in breach of its obligations under the lease and so could not serve a valid break notice. Quirkco sought a declaration that the lease was continuing and a judgment in respect of arrears of rent. Aspray sought a declaration that the lease had been brought to an end by its break notice.
The break clause provided as follows:
6.11.1 The lessee or lessor may determine this Lease on 18 December 2010 by serving on the other not less than 9 months prior written notice expiring on that day.
6.11.2 This lease shall only determine as a result of notice served by the lessee under this sub-clause if at the time of expiring of such notice:
188.8.131.52 there are no arrears of any rents reserved or any other sums payable under this lease, and
184.108.40.206 there is no other material outstanding breach of any lessee;'s covenant; and
220.127.116.11 on or before the intended date of determination the Lessee gives vacant possession...; and
18.104.22.168 that notice has been served in accordance with this sub-clause
6.11.3 If any of the above condition is [scil.conditions in] 6.11.2 above are not satisfied at the date of the expiry of such notice the notice is deemed to be of no effect and this lease shall continue as before...
6.11.4 If the provisions of clause 6.11.2 are complied with then upon the expiry of the notice of termination this lease shall determine...
The landlord was obliged to insure the premises and under the lease the tenant had to pay “such yearly sum or sums (“the insurance charge”)…as the lessor may from time to time expend in insuring and keeping insured the demised premises”.
The tenant, having no further need of the property, exercised its right to break in a notice dated 8 March 2010. The landlord asserted the break was invalid on two grounds. Firstly that the tenant was in arrears of rent, namely insurance rent. Secondly, that the tenant was in material breach of its repairing covenants.
Chronology of relevant events
- On 09/11/10 the landlord’s insurance broker sent through the schedule for the new policy which was to be renewed on 30/11/10.
- On 23/11/10 the landlord sent the tenant an invoice for the insurance charge for the period 01/12/10 to 30/11/11.
- The tenant responded on 25/11/10 reminding the landlord that it had served a break notice and it requested a revised invoice covering only the period up to 18/12/10.
- The landlord sent the broker a cheque for the renewal premium but it was never received and was eventually stopped.
- The landlord wrote to the tenant on 29/11/10 stating, “there are pre-conditions…to be met for the break to be effective and therefore the premium that has properly fallen due has been properly invoiced.”
- The landlord did not pay the insurance renewal premium until 11/01/11, after it had discovered the problem with its initial cheque.
The key issues:
- Whether at the time of the expiry of the break notice there were any arrears of rent in respect of the insurance charge. The tenant argued that the landlord had expended nothing in relation to the premium and so was not entitled to demand payment for it.
- Whether the arrears were de minimis and did not invalidate the break notice.
In respect of the first issue, the judge restated the principle that each particular lease must be construed individually. He decided that as at the date of the demand for the insurance charge the landlord had not paid any sums in insuring the property. The demand was therefore invalidly served and did not give rise to a liability on the part of the tenant to pay the insurance charge before the expiry of the break notice. The court deferred to trial the issue of whether the tenant was in breach of any other covenants rendering the break notice invalid but the landlord was unable to rely on failure to pay the insurance charge and the court gave summary judgment in the tenant’s favour on this point.
On the second issue there was a dispute about whether the amount to be considered was the annual insurance charge of £3,609.72 or the amount for the period before expiry of the lease which was £150.50 plus VAT. The judge decided it did not make any difference as all conditions of the exercise of an option must be strictly performed. He referred to Woodfall’s Landlord and Tenant which states:
“Where an option is conditional on performance by the tenant of his covenants, the condition is treated as a condition precedent. Accordingly, it must be strictly performed, and even a trivial breach will preclude the exercise of the option.”
The case therefore reminds both landlords and tenants of the need to comply strictly with the terms of the lease if they want to be able to rely on their rights to rely on a break clause.
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