Break clauses and landlords’ tricks

Break clauses

To give both the landlord and tenant security, a commercial lease is usually granted for a long - but specific - period of time, e.g. five, ten or 15 years. At the same time, however, a “break clause” is often included within its terms. This allows the parties to end the lease early, on an agreed date, provided that the rental payments are up-to-date and the tenant has complied with all their obligations.

New tricks

Unfortunately, with the economic climate as it is, commercial landlords are routinely trying to prevent their tenants from exercising break clauses - an early departure could, of course, mean that they are left with vacant premises they can’t re-let, even at a much lower rent. This is exactly what happened in Avocet Industrial Estates LLP v Merol Ltd 2011, where the dispute had arisen over £130! So what happened?

Latest case

Merol Ltd (M), was the tenant in a ten-year lease. It wanted to end this early and the break clause allowed for termination on March 17 2010. The lease also provided that: (1) a break clause notice would be ineffective if any payment which was due on, or before, the break date hadn’t been paid in full; and (2) M had to pay a sum equal to six months’ rent by the break date if it wished to rely on the provisions of the break clause.

Written notice. M hand delivered the notice the day before the break date, i.e. March 16 2010. It also enclosed a cheque by way of payment.

An unhappy landlord

The landlord, Avocet (A), then claimed that M couldn’t rely on the break clause because:

• the lease required the payment of six months’ rent to be in “cleared funds” (a cheque doesn’t fall into this category); and
• interest of £130 fell due on previously late rental payments (although A had never demanded this formally from M).

Court challenge

The court ruled that as A had accepted cheque payments from M before, this “previous course of dealings” gave rise to an implied agreement that this method was acceptable, i.e. it made the specific requirement for cleared funds null and void. Despite that favourable decision, M came unstuck on the interest payment. Here the court noted that the lease made no reference to A either having to demand or quantify it. Therefore, M still owed the outstanding amount and hadn’t successfully complied with the break clause.

Tip 1. When looking to exercise a break clause, go through the lease carefully and ensure that you’ve complied with every condition. If there’s a default clause that allows for interest payments, ask the landlord to confirm the amount outstanding. Should you disagree, pay it in full “under protest” and argue the toss later. This is safer than finding out a shortfall has rendered your notice invalid.

Tip 2. If a premium has to be paid to exit the lease, don’t leave it until the last minute. Also send it as cleared funds, e.g. a banker’s draft or bank transfer. These are unlikely to be disputed.