Key points
- Where rent falls due before a break date, it will usually be payable in full, although the position will always depend on what the lease says
- A tenant who apportions the rent in this situation runs the risk of invalidating the operation of the break
Canonical UK Ltd v TST Millbank LLC
2012 saw a flurry of break clause cases, and just before Christmas another was added to the list in the form of Canonical UK Ltd v TST Millbank LLC.
In February 2012, the tenant served a valid notice on the landlord to break the lease on 22 August 2012. The break clause provided that the break would only operate if (among other things):
- the rents under the lease were paid up to and including the break date; and
- the tenant paid to the landlord, on or before the break date, a sum equivalent to one month's rent.
On 7 June 2012, the landlord issued an invoice demanding a full quarter's rent for the period commencing on 24 June. The tenant paid the sum demanded by bank transfer, quoting the invoice number as its reference. No additional payment was made in respect of the month's rent required by the terms of the break clause.
The tenant argued that, since the break date fell part-way through the quarter, only approximately two months' rent was due on the June quarter day. It contended that the balance of the payment it had made should be attributed to the reverse premium due under the break clause. There were therefore two issues in the case.
Was the tenant entitled to apportion the rent?
The rent clause in the lease provided that the tenant had to pay
"yearly and proportionately for any part of a year the Yearly Rent ... by equal quarterly payments to be made in advance on the usual quarter days in every year the first such payment or a proportionate part thereof (being a proportionate payment in respect of the period commencing on the Rent Commencement Date ... and ending on the day before the next succeeding quarter day) to be paid on the Rent Commencement Date".
The tenant argued that the words "yearly and proportionately for any part of a year" meant that the payment which had to be made was only in respect of the period up to the break date.
The judge disagreed. Following another 2012 case, Quirkco Investments Ltd v Aspray Transport Ltd, he ruled that the wording merely dealt with the tenant's liability at the beginning and end of the term by effluxion of time (noting that the contractual term would have ended in the middle of a quarter).
The rent clause required a quarter's rent to be paid on the June quarter day. The words "proportionately for part of a year", even read in conjunction with the break clause, could not be taken as reducing the rent otherwise payable after a break notice had been served, just because the lease may end in the middle of that quarter.
Because the break was conditional, as at the quarter day it was unknown whether or not the lease would terminate in accordance with the break. The court thought that business certainty was important. The full quarter's rent had to be paid, leaving it to be later determined whether the "excess" rent was repayable.
Could the balance of the payment be appropriated to the sum due under the break clause?
The tenant failed in its first argument. This meant that the break had not operated, since the tenant had not paid the additional one month's rent required by the terms of the break clause.
However, had the tenant succeeded in contending that only part of the quarter's rent was due, it would then have argued that the balance of the June payment should be treated as the reverse premium which had to be paid to the landlord as a condition of the break.
The court ruled in favour of the landlord on this point as well. It held that the payment was clearly attributed by the tenant to the invoice, otherwise the payment advice would not have mentioned the invoice number. The landlord could not know that it was intended to cover the reverse premium.
Therefore, even if the tenant's construction of the lease had been correct and only two months' rent was due on the June quarter day, the payment made by the tenant was a payment in respect of the whole of the quarter day's invoice and could not be regarded as payment of the reverse premium.
For that reason also, the break would fail.
Things to consider
The first point at issue in this case is very similar to that in one of the other 2012 cases on break clauses; PCE Investors Ltd v Cancer Research UK. In that case the High Court ruled that the tenant was obliged, as a pre-condition to the exercise of the break, to pay the full quarter's rent that was due on the quarter day immediately prior to the break date.
The tenant in PCE Investors appealed, and that appeal is due to be heard by the Court of Appeal in February 2013. The judge in the Canonical case therefore granted permission to appeal to the tenant, and we understand the intention is that the two appeals will be heard together.
There is a slight difference in the drafting of the rent clause between the two cases. The PCE Investors lease did not contain the wording "and proportionately for any part of a year" (although it did deal with an apportionment for the first payment of rent from the rent commencement date down to the following quarter day). It is possible that the Court of Appeal could come to a different conclusion on each case.
A further update will be issued when the outcome of the appeals is known. In the meantime, advice to tenants wishing to exercise a conditional break remains to pay all monies which could potentially be due, while reserving the tenant's right to dispute after the event whether certain sums were in fact owing.