Show me the money – broken breaks

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Steve Schofield, Partner, Commercial Property, Bristol, Thrings. Photo: Professional Images/@ProfImages

In the latest in his series of articles on break clauses, Steve Schofield, partner at leading commercial law firm Thrings, considers break conditions requiring rent and other monies to have been paid, and how they can harm an unwary tenant.

In last month’s article for Commercial News Media, I explained how a break clause – a right to end a lease early – can be problematic because landlords often try to make the right to end the lease conditional on the tenant complying with various conditions. A common example is a clause which requires the tenant to have “paid all rent and other monies due under the lease”. As with the requirement for “vacant possession”, conditions requiring payment of “all sums due” seem innocuous. However they can have costly implications.

So what issues do tenants need to be aware of?

Last-second demands

Some payments under leases, such as rent, are set amounts which are due at regular intervals and which tend to cause few problems. Other payments – insurance and service charges, for example – are fluctuating amounts which can often only be paid once the landlord has issued an invoice. Until that point, the tenant doesn’t know how much is due.

Unfortunately for the tenant, unless the lease says otherwise, there is nothing to prevent a landlord from demanding insurance, service charges or some other payment at the last minute (even on the morning of the break date itself). If the tenant isn’t able to process the invoice and pay it in cleared funds by the break date, a break right containing an “all sums paid” condition would fail because they would not have paid all of the amounts due.

Unrequested amounts

In the Avocet v Merol case, the tenant had occasionally paid their rent late. The lease contained standard wording, namely that interest would be charged if rent was paid late. In this case, about £130 interest was technically due, but in practice the landlord had never requested it.

After the break date, the landlord argued the break right was ineffective on the grounds that the unpaid interest amounted to the “all sums paid” condition not being complied with. The court agreed, saying that the fact that the landlord had never asked for these monies was irrelevant – the break right required all payments to have been made, and the interest had not been paid. Further, the judge suggested this was “something of a trap for a tenant”.

No refunds?

Many tenants are also surprised to find they need to pay a full quarter’s rent in the run up to exercising a break right, even if the lease ends during the quarter. For example, a tenant paying rent on so-called “usual quarter days” (25 December, 25 March, 24 June and 29 September) with a break right on 1 April, would, unless the lease states otherwise, still have to pay a full quarter’s rent on 25 March.

Unfortunately, this can be more than a mere cashflow issue, as unless the lease specifies it, the landlord is not automatically obliged to refund the overpaid amount. In the example above, the landlord could keep all of the rent paid even though the lease had ended less than a week into the quarter.

In 2013 Marks & Spencer brought a court action against one of its landlords to try and secure a refund of overpaid rent. The High Court agreed with Marks & Spencer and ordered the overpaid rent to be refunded. But the decision was later overturned by the Court of Appeal and the Supreme Court. The law, as it currently stands, states that landlords are entitled to keep the additional rent unless the lease says otherwise, and well-advised tenants will deal with this point expressly in the lease.

Action points – if you already have a lease

Take early advice from your solicitor on how (or if) the landlord could seek to subvert your break right. Forewarned is forearmed, and it is possible to make useful preparations if there is sufficient time.

Review your payment history to check you are up to date, and any interest due has been paid, even if the landlord has not requested it.

Make arrangements to be able to pay any last-minute demands, and have funds and your finance team available to deal with this.

Action points – when taking a new lease

Expressly agree that any overpaid rent will be returned to you.

Amend the break condition so it only applies to amounts demanded in writing at least, say, two weeks before the break date, so you will have time to arrange payment of any invoice.

Ideally, the lease should say that the break will not be conditional on payments which are the subject of a genuine dispute (that doesn’t mean the disputed amount drops away, just that you won’t have to pay an unfair or inaccurate demand simply to ensure that you can end the lease).