It has been widely reported that any pre-conditions attached to tenants' break clauses in commercial leases must be strictly complied with, otherwise the exercise of the break right will be deemed ineffective. However, a recent case has taken this to extremes.
In the case of Avocet Industrial Estates LLP v Merol and another, the tenant's lease included a right for the tenant to terminate the lease on a particular date, but any notice to exercise that right would not be valid if '… at the Break Date any payment under this lease due to have been paid on or before that date, has not been paid.'
During the period from service of the notice until the date on which the lease was to end, the tenant did pay rents late on three occasions, but all rents were brought up to date prior to the break date.
The lease included a standard provision that if any payments were made late, interest would be payable. The landlord had not issued any demands. However, shortly after the termination date, the landlord stated that the termination was ineffective and issued proceedings against the tenant, on the basis that as the tenant had paid a few instalments late, interest was due and therefore the tenant had not paid all payments due under the lease.
The court found in favour of the landlord. Although the landlord had not served any demand for interest, there was no requirement on it to do so. The tenant tried to claim that the landlord should not be able to rely on the interest now, having failed to raise the claim previously, but on the facts of the case the court decided that the landlord had not deliberately overlooked the ability to claim interest. The tenant had paid instalments late, so interest was due and had not been paid by the tenant prior to the date on which they sought to terminate the lease, so the break notice was ineffective.
The court recognised that this was a harsh judgment, but the message for tenants is clear. Any pre-conditions on a right to terminate a lease early, particularly requiring full compliance with the lease, should be resisted. The Code for Leasing Business Premises in England and Wales 2007 does recommend that the only pre-conditions to break rights should be that the tenant gives up possession, leaves no existing sub-leases, and has paid the principal rent up to date, as any other disputes can be settled separately.
However, in the current market, landlords with non-Code compliant leases faced with an impending tenant's break and the threat of empty premises should be aware of the potential power that they have to hold a tenant to the remainder of its lease.