In the case of Avocet Industrial Estates LLP v Merol Ltd, a tenant’s failure to pay interest of £130 resulted in it being tied-in to a further five years under its lease as a result of an ineffective break. The judge concluded that the decision was “harsh” but one that he was obliged to reach.
The tenant had a 10-year lease with an option to break on 17 March 2010. The break option was conditional on the tenant having paid a one-off amount equivalent to six months’ rent and having settled all sums due under the lease up to the break date.
Under the lease, the tenant was required to pay default interest on any sums paid late during the term. On several occasions the tenant failed to pay its rent on time and the landlord had sometimes (but not always) made demands for default interest.
Seven months before the break date, the tenant served notice to terminate the lease. The notice stated that the tenant was not aware of any outstanding sums due under the lease and that the landlord had not given notice of any breach.
The day before the break date, the tenant sent the landlord a cheque for six months’ rent, together with the keys for the premises. The covering letter re-iterated that the tenant was not aware of any outstanding sums due under the lease.
On 7 April 2010, the landlord wrote to the tenant stating that the tenant had not complied with the break clause because:
- the payment of six months’ rent had been made by cheque rather than cleared funds into the landlord’s bank account; and
- default interest was payable on late rent payments and had not been paid.
The tenant argued that payment by cheque was sufficient and that no interest was due as it had not been formally demanded by the landlord.
The landlord was not entitled to reject payment by cheque. The general rule is that payments should be made by legal tender (which a cheque is not). However, this can be varied by the course of dealings between the parties. In this case, the landlord had regularly accepted payment by cheque and there was an implied agreement that the landlord would continue to do so. The payment made by the tenant was therefore sufficient.
Under the wording of the default interest clause, the landlord was not required to have formally demanded interest. The liability to pay interest arose when a payment became overdue and not when a demand was issued. The tenant had not paid the default interest due under the lease and had therefore not complied with the conditions of the break clause. The break was ineffective.
This is a harsh decision and tenants need to be aware that break conditions will be interpreted strictly. Tenants should try to negotiate break conditions that do not require them to be up to date with payments other than rent (which is the recommended position under the Code for Leasing Business Premises in England and Wales 2007).
If this cannot be achieved, tenants should seek to limit their liability to those payments which have been formally demanded by the landlord in writing at least seven days before the break date.
If it is a condition of the break right that all sums due under the lease have been paid, tenants should carefully check if default interest may be payable on past arrears and push their landlord for confirmation as to whether any sums due under the lease are outstanding.