Key points

  • A lease may require the landlord to have actually paid the insurance premium for the property before it can recover the cost from the tenant
  • This may be relevant where a break clause requires the tenant to pay all sums owing up to the break date in order for the lease to break

Facts of Quirkco Investments Ltd v Aspray Transport Ltd

The tenant served a break notice to bring its lease to an end on 18 December 2010. The break clause provided that the lease would only determine as a result of a break notice if, at the time of expiry of the notice:

  1. there were "no arrears of any rents reserved or any other sums payable" under the lease; and
  2. there was no other "material outstanding breach" of any tenant's covenant.

The landlord alleged that the tenant was in arrears of insurance rent as at the break date, and that therefore the lease had not terminated.

The renewal date of the landlord's insurance policy was 30 November 2010. On 23 November 2010, the landlord sent the tenant an invoice for the whole of the insurance premium for the year 30 November 2010 - 29 November 2011. The invoice was however dated 1 December (which the landlord believed was the renewal date).

On receipt of the invoice, the tenant wrote back to the landlord, reminding the landlord that the break had been operated, and requesting an apportioned bill for the period to 18 December 2010 only. The landlord refused, contending that the whole amount was due. The tenant paid nothing, although it contended that, but for an oversight, it would have paid £151.50 plus VAT, being its calculation of the apportioned amount.

On 26 November 2010, the landlord sent its insurance broker a cheque for the premium. Unfortunately, that cheque was never received, and was subsequently stopped. The broker paid the premium to the insurance company on the landlord's behalf on 15 December 2010. On 24 December 2010 the claimant then sent another cheque to the broker.

The tenant defended the landlord's claim on a number of grounds. Its main defence was that there were no arrears at the break date, because as at the date of the insurance demand the landlord had not expended anything on insurance and so was not entitled to demand payment.

Defence one: there were no arrears at the break date

The tenant argued that the landlord was only entitled to demand payment in respect of sums which it had actually expended on insuring the property. Whether the date of the demand was taken to be 23 November or 1 December (the court assumed the latter), the landlord had not by then paid any sums in insuring the property.

Clause 2.3 of the lease provided that the tenant would pay:

"Within 14 days of written demand ... such yearly sum or sums ... as the Lessor may from time to time expend in insuring and keeping insured the demised premises ... " (emphasis added).

The court ruled that the "ordinary and natural construction" of clause 2.3 was that the tenant was only liable to pay the sums that had actually been spent on insurance by the landlord. This was supported by the clause dealing with the landlord's obligation to insure, which required the landlord to produce to the tenant both the insurance policy and the receipt for the last premium. The court also thought that, even if the first cheque had arrived with the broker, this would not meet the requirements of clause 2.3, because a broker is the agent of the insured, not the insurer.

On that basis, the demand was invalidly served by the landlord, and did not give rise to a liability on the part of the tenant to pay the insurance charge before the break date. That was enough to deal with the landlord's challenge to the validity of the break on the grounds of non-payment of insurance rent. However, the court went on to deal with the tenant's other defences in any event. The most interesting of these is considered below.

Defence two: even if there were arrears at the break date, they were de minimis and did not invalidate the operation of the break

The tenant argued that, even if there were arrears of insurance rent as at the break date, they were de minimis and did not render the break ineffective. This argument would only have a prospect of succeeding if the tenant was correct in asserting that it was only liable for £151.50 plus VAT, since the tenant accepted that the full amount of the premium could not be classified as de minimis.

The tenant accepted that the amount due under clause 2.3 would have been the full premium. However, the tenant submitted that the effect of the determination of the lease as a result of the break would be to give it a right to reimbursement of rent, including insurance rent, because those sums should be apportioned. The tenant argued that the operation of the de minimis principle should look to the net position after the right of reimbursement had accrued.

The court ruled that any right of restitution could only arise after the determination of the lease. The lease could only determine if there were no arrears. The right of restitution therefore depended on the tenant first paying the full amount.

Moreover, the court held that the tenant's position would be no better even if the arrears were only £151.50 plus VAT. The conditions to the exercise of a break option must be strictly performed. The lease was absolute in its requirement that there should be no arrears. Therefore, any failure to comply would prevent the lease from breaking. The first condition under the break should be contrasted with the second condition regarding breaches of other covenants, which was qualified by the word "material".

Things to consider

Although the tenant succeeded on its first defence, this case was only an application by the landlord for summary judgment. The landlord had also alleged that the tenant was in material breach of its repairing covenant. This issue (and therefore the validity of the break) will still need to be decided at trial.

Each lease will be considered according to its own terms. The court acknowledged that it would be possible for a lease to entitle a landlord to seek payment of insurance rent before it has actually laid out money on the premium. As such, it will not be safe for a tenant to rely on this case in order to resist payment on this ground without first taking legal advice. However, where a lease does require pre-payment of the premium by the landlord, a tenant who wishes to be certain that its liability to pay has crystallised should ask for a copy of the receipt for the premium.