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Russell May
Russell May,
Tenants failure to pay full rent when exercising a break clause was fatal
14 June 2012

In a previous article the potential dangers of exercising break clauses in leases were highlighted. The court has looked at this area again in PCE Investors Limited v Cancer Research UK [2012], a case which highlights another trap for the unwary.

The facts

  • The rent reserved by the Underlease was £190,000 per annum payable by equal quarterly payments in advance on the usual quarter days every year.

  • The term granted by the Underlease was for a term commencing on the Possession Date (defined as 12 October 2005) and expiring on 27 September 2014.

  • The Break Clause in the Underlease provided as follows:
    “The Tenant may determine this Underlease on the expiration of the fifth year of the term (“the Termination Date”) by satisfying the following conditions:
    • The Tenant must have paid the rents reserved and demanded by this Lease up to the Termination Date; and
    • The Tenant must have given to the Landlord full vacant possession of the Premises
    • AND provided such conditions are satisfied the Underlease shall cease and come to an end at 12 noon on the termination date but that termination shall not affect any claim by either party against the other for breaches of obligations under this Underlease.”

  • The tenant contended that it served a notice on 25 September 2009 giving notice to determine the Underlease on 11 October 2010.

  • On 24 September 2010 the tenant emailed the landlord’s managing agent informing him a payment of rent had been made for the period 29 September 2010 to 12 October 2010, i.e. the period between the quarter day and the termination date. Confirmation was sought by the tenant that this was “the correct basis for calculating the liability for the short period” but the Landlord did not respond. The amount tendered by the tenant was £8,563.01 including VAT (as against a quarterly rent of £55,812.50).

  • The landlord’s solicitors wrote to the tenant on 2 November 2010 demanding the rent up to the termination date and referring to the fact that the Tenant had been sent an invoice for the September quarter’s rent and service charge. The letter also contended, amongst other things, that for the break clause to be operative the sums claimed had to be paid by the termination date.

  • If the landlord was right then the tenant had failed to exercise the Break Clause properly and the lease would continue until 27 September 2014 at an annual rent of £190,000 per annum, i.e. a further exposure of £760,000 in terms of rent alone.

The judge’s findings

  • The judge found the rent was a yearly rent but with the concession that it could be paid on a quarterly basis.

  • On 29 September 2010 whilst the Underlease was still subsisting an obligation fell on the tenant to pay the next quarter’s rent up to 25 December 2010.

  • The judge could not see how it could be right as a matter of construction that an obligation on 29 September 2010 to pay a full quarter’s rent could somehow be retrospectively reduced because an event after that date terminated the Underlease from that future date.

  • In the judge’s view the position as to the rent was clear. A full quarter’s rent was due on the September quarter day which was payable in advance. On that date it could not be certain that the lease would terminate on the termination date (because it was not certain, for example, that the tenant would give vacant possession) and therefore the full quarter’s rent had to be paid.

  • The tenant argued that the landlord was estopped from challenging the validity of the break notice because it should have acted “honestly and responsibly” and replied to the email of 24 September 2010 telling the tenant it needed to pay the full quarter’s rent. The judge could not see that the landlord contributed to the risk that the short payment would not be in compliance with the break clause or that the tenant could have believed that the landlord thought anything less than full payment was due. If the landlord had replied, accepting that the short payment was all that was due, then it would have been estopped from claiming the full amount, and that the break had not been validly exercised, but that did not happen here. Instead the landlord had previously demanded the full rent and did not revert from that position.

  • The judge therefore found that the tenant’s break notice was invalid.

Traps for the unwary

  • Whilst cases of this nature are (to a certain extent) dependent on the wording of the particular lease, the decision serves as a useful reminder of the pitfalls associated with exercising breaks. It is essential to ensure that when the requirements of the break clause are a condition precedent to the termination of the lease those requirements are observed to the letter. Failure to do so will almost certainly render the break invalid, leaving the tenant with an unwanted ongoing liability under the lease.

  • Given the potential dangers it is important to seek legal advice in connection with the exercise of a break clause. 

If you have any queries regarding a property dispute then get in touch with our expert dispute team on 0118 959 7711 or submit an enquiry.

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.

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