Break clauses are important to tenants because they allow them the valuable flexibility to exit a lease for any reason, whether it is for expansion, a change of direction or if the business is not going as well as expected. However, landlords in the current economic climate will be keen to maintain their source of income and will find any reason to argue that the break option has been invalidly exercised.
In order to exercise the break option validly, the conditions within the break clause must be strictly performed. Often leases include clauses which require the Annual Rent to have been paid in full at the break date. However when rent must be paid in advance, the break date can in many situations fall between rent payment dates, i.e. the rent payment date is the 24th June, but the break date falls on the 30th June. In cases such as this, surely the tenant is allowed to apportion that advanced payment, so rent is only paid for 7 days?
In the case of PCE Investors v Cancer Research UK (2012), in order to exercise the break clause validly the tenant was required to provide vacant possession of the Premises by the break date and pay to the landlord "the rents reserved and demanded by this Lease” up to the break date.
The tenant apportioned the rent and only paid it up to the break date. The tenant then asked the landlord to confirm that the final tranche of rent was calculated correctly. The landlord did not respond.
After the break date, the landlord notified the tenant that it should have paid the full quarter’s rent (including the period of time that the tenant had vacated the property) and therefore the break was invalidly exercised and the tenant was still liable for the remainder of the lease term.
The court agreed with the landlord and also held that the landlord was under no obligation to inform the tenant that the final rent calculation was incorrect. Such a decision may be attractive to landlords whose tenants have only paid an apportioned part of rent rather than the full amount.
However, more recently in the case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another , where the tenant exercised a break clause part-way through a quarter, having paid the rent for the full quarter, the High Court implied a term into the lease entitling the tenant to a repayment of the rent from the break date to the end of the quarter.
This decision is a departure from the widely-accepted view that, in the absence of an express provision, a tenant will not be entitled to a refund of any rent paid that relates to the period after a break date.
What does this mean?
As a starting point, when negotiating a new lease, try to secure an unconditional break right. If this is not possible then ensure a right exists for you, as the tenant, to apportion the final payment of rent and any other sums due up to the break date.
Most importantly, when exercising a break right, always seek professional legal advice and always pay the full amount of any sum due under the lease, even if the break date falls one day after the rent payment date – the full rent instalment should be paid. Notwithstanding the Marks and Spencer decision, tenants would be well-advised to ensure that the terms of a lease with a break clause expressly provide for a repayment of rent from the break date to the next quarter day, if this is intended. This is particularly important if the exercise of the break clause is conditional on the tenant paying a full quarter's rent.
Julie White is a Director and Head of the Commercial Property Department at BHW Solicitors in Leicester. Julie has over 25 years’ experience of commercial real estate transactions and regularly writes on commercial property issues. Julie can be contacted on 0116 281 6228 or by email at email@example.com.