If you are the tenant of a building and have been late paying rent at any time during the lease - even if by just one day – you may find you can not validly exercise your break clause and will be liable for the full rent until the end of the lease.
This was the decision of the judge in the recent case of Avocet Industrial Estates LLP v Merol Limited (1) and Tudor Rose International Limited (2) and may mean that many tenants simply can not validly exercise break clauses in leases in the future.
It is a surprising decision, to say the least, but one that makes logical sense and indeed, the judge appreciated that it was “harsh” but felt it was a decision he was obliged to reach.
The basic facts of the case are that the tenant served a break notice on the landlord and the lease said that the break would be of no effect if:
"...at the Break Date any payment under this lease due to have been paid on or before that date, has not been paid."
As usual the lease also required that if any payment due under the lease was not paid on the due date then interest was payable until such monies were paid.
In August 2009 the tenant served the break notice on the landlord accompanied by a careful letter from the tenant’s solicitors setting out in some detail the position with the Annual Rent, Insurance Rent and Service Charge and stating that they did not believe there were any outstanding sums due to the landlord under the lease.
Seven months later, in March 2010, the tenants returned the keys to the landlord with written confirmation they had vacated the premises and the covering letter again reiterated that the tenant was not aware of any outstanding sums due to the landlord under the lease.
At the beginning of April 2010 the landlord wrote to the tenant stating that the tenant had not complied with the break clause because, amongst other things, the tenant had paid rent and other sums late so interest was payable and outstanding and therefore the break notice was ineffective.
In this case the annual rent was £67,500 a year and by the Judge’s calculation the interest due on the late payment was only about £130 which in the Judge’s view was “modest”!
However, the Judge went on to say that size did not matter and that although the result was “a harsh one” it was one that he felt he was obliged to reach.
It is worth pointing out that the late payments of rent actually related to three invoices raised by the landlord between August 2009 when the tenant served the break notice and March 2010 when they actually vacated the premises.
The tenant should perhaps have been more careful, particularly as there were previous examples of the landlord demanding small amounts of interest on late payments of rent. However any late payment of any sums due under the lease could allow the landlord to argue that unpaid interest was due and outstanding and therefore the break was invalid.
The final point to note is that the tenant’s solicitors argued that interest should only arise if the landlord demands from the tenant interest on the late payments. However, in this case, the judge decided that there was nothing in that particular lease which required that the landlord must serve a valid demand on the tenant for interest in order for that interest to become due.
Traps for the unwary
This is clearly a terrifying case for all tenants who are intending to exercise a break. The tenant is, unsurprisingly, appealing - but if the decision is not overturned on appeal it could mean that, in instances where the lease requires all payments due to have been paid on the break date in order for the break to be valid, a break notice could be ineffective if one payment by the tenant was paid late in any of the preceding years of the lease and if interest due has not been paid, even if it has not been demanded.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.