Recent cases have underscored the need for tenants to avoid conditional break rights in leases - it is too easy for a break notice to fail on a technicality. Courts have been singularly unsympathetic to tenants guilty of even the smallest departure from strict compliance with break rights. But what if the tenant has complied? Surely nothing else can go wrong?
Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Another
Difficult trading conditions have meant that landlords continue to challenge the exercise of break rights. Courts continue to interpret break provisions strictly sometimes with dire consequences for tenants as is illustrated in the recent £1.1 million dispute that arose when Marks & Spencer exercised its break right over leased office accommodation in Paddington.
Briefly, the facts
For those of you that follow our Property Matters blog, you will already be familiar with the background to this case. Marks & Spencer issued break notices (there were in fact four leases of accommodation within the same building, all with the same break rights). It was very careful to ensure that the validity of the notices could not be challenged. In particular, it ensured that all rent due was paid – including rent payable in advance but relating to the remainder of the quarter after the break date. Marks & Spencer then sought to obtain repayment of this excess rent. It succeeded in the lower court. The Court of Appeal, however, supported the landlord’s contention that no rent needed to be repaid.
The lessons learned and general points
- While this is an extreme example with high rents, the principle is important wherever there is a break right and rent is paid in advance. Tenants need to negotiate the detail of a break right at the heads of terms stage to give their lawyer the best chance of moderating any excesses in the landlord’s “standard break clause” - which may be conditional and which certainly will not have a repayment of rent provision in it.
- Tenants should not rely on general wording in a lease referring to rental payments being apportioned for periods less than a whole quarter. This may not guarantee that the last payment can be apportioned if the lease comes to an end prematurely.
- Landlords will often insist (as in the Marks & Spencer case) that all rent is paid even if other conditionality is avoided. Remember that such a provision will require the tenant to pay rent in full when due as if the break right had not been triggered. Any failure to do so will invalidate the break notice. Make sure that the break clause contains specific provisions requiring repayment of any rent attributable to a period after the break date. It is helpful if this is specifically agreed in the heads of terms.
- Many leases make little or no provision for repayment of other sums paid in advance such as insurance and service charge. Prospective tenants might want to consider how these payments will be dealt with on early termination so that specific provision can be included in the lease.
- The dispute in the Marks & Spencer case would have been avoided if the break date had corresponded to the last day of a quarter. It is possible to engineer break dates so that there is no advance payment of rent covering a period after the break date, but this requires agreement at the heads of terms stage.