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More Break Clause Gremlins

View profile for Mark Kendrick
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Two 2012 first instance cases have focused on the particular issue of the common pre-condition in break clauses that tenants must have paid their rent up to the specified break date, and there continues to be little comfort for tenants and their advisors.

In PCE Investors Limited v. Cancer Research UK the lease had a usual covenant to pay rent by equal quarterly payments on the usual quarter days.  There was a break clause requiring that “The Tenant must have paid the rents reserved … up to the Termination Date”.  That was 11 October, so understandably on the September quarter day the tenant paid rent up to and including 11 October.  This was held by Peter Smith J not to satisfy the break condition.  This seems counter-intuitive but his reasoning was this; when the rent fell due there was no certainty that the break would be effective, because that could only be determined after the break date.  The tenant may not, for example, have vacated the premises by the break date.  The “clear obligation” on 29 September could not be retrospectively reduced because an event after that, the (possible) successful exercise of the break, would terminate the lease at a future date.  His reasoning was that certainty must be sacrosanct, that “A tenant knows precisely what it has to do”.  He said that tendering a short rent could if the break failed (for instance because the tenant stayed in occupation beyond it) give rise to a shortfall and a retrospective breach of the covenant to pay a full quarter’s rent.

Pity the poor tenant and even the draftsman at the time the lease was granted.  I would be extremely surprised if anyone, landlord or tenant, or their respective solicitors, expected that in agreeing the words “up to the Termination Date”, the tenant having served the break notice, was to be required to pay rent for the balance of the quarter after it, and that the break right would fail if he had not despite compliance with the requirements of the break clause provision in every other respect.

 It gets worse.  In Canonical UK Ltd v. TST Millbank LLC the break date was 22 August.  Here the rent was specified in the reddendum to be payable “yearly and proportionately for any part of a year … in advance on the usual quarter days”, which is completely normal.  The break clause required the rent to be paid “up to and including the Break Date”.  Vos J rejected the common sense view that the combination of these provisions showed intent for the landlord only to receive rent up to the break date.  There is no doubt that at the end of the term of the lease the tenant would by those words in the reddendum only need to pay proportionately up to the end of it.  A break right serves to bring the end of the term forward to the break date.  However, Vos J ruled that because the tenant may not comply with the conditions of the break clause (for instance by not vacating) it is unknown whether the break right will be successfully exercised until it proves to have been after the event is and if it is not “It would be as if it had been written on water” he said.  Harsh poetry indeed.

 Vos J admitted that the outcome seems harsh on the tenant.  Indeed it is.  It is also a Catch-22.  Even if the lease says the tenant only needs to pay the rent up to the break date, these judgements say that doing so renders the break ineffective and the reason for that is the possibility that the break may prove to have been ineffective.  Tenants, it seems, if they are to be absolutely sure that their break entitlement will not be contested must pay a full quarter’s rent for the quarter in which a break right for which a break notice has been served, irrespective of what the lease says and irrespective of whether the rent demand is for only up to the break date.  Then the tenant must, in the absence of an express clause requiring it to do so hope that when he is gone from the premises the landlord will be generous and give some of it back.

This guide is for general information and interest only and should not be relied upon as providing specific advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.