Give Me a Break Clause!
In recent years, conditions to break clauses have generally become slimmer and more focused. There has been an increasing acceptance that if the conditions are too broad, particularly in respect of compliance with tenant covenants as a whole, it makes the break in any real sense unworkable, or at least easily open to challenge. However, even in this latest phase, and despite the decrease in length of most commercial leases, new problems are arising. The elephant traps seemingly continue to abound!
It is no real surprise that hardened times have resulted in tenants looking to use break clauses, where available, to extricate themselves from leases. And it is no surprise that some of those attempts to break have been challenged by landlords. Given the history of judgments on break clauses, with strict compliance being the mantra, it should perhaps be no further surprise that even ‘leaner’ break clause provisions are being interpreted strictly by the courts.
We saw last year in the case of Avocet Industrial Estates LLP v Merol Ltd that paying off all arrears and known rent wasn’t sufficient to satisfy the pre-condition that all payments due under the lease had to have been paid for the break to be successful. The court held that the tenant should have estimated the interest due to the landlord on the historic (and cleared) arrears, even though no interest had been demanded.
In PCE Investors Ltd v Cancer Research UK the principle of apportionment was put under the microscope. In that case, the break date fell between two quarter days. Under the break clause the main rent had to be paid ‘up to break date’ for the break to succeed. So the tenant did what is said on the tin, and paid the rent in respect of the period up to the break date, as opposed to the full quarter’s rent. This was however held to invalidate the break. The court said that the tenant should have paid the full quarter’s rent, and then applied for an apportioned refund following the successful exercise of the break.
PCE Investors Ltd was a High Court decision, so may be appealed. Nevertheless, it is clear that tenants have to be incredibly careful when negotiating and exercising break clauses; from the method of service through to the monies to be paid, this remains a controversial and difficult area. For landlords, the trick seems to be to keep quiet: if you haven’t confirmed or denied anything, then you could challenge a tenant break at a later date, should you so wish.
This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 020 7404 0606 and ask for your usual Goodman Derrick contact.