Case law surrounding the operation of break clauses continues to develop rapidly, with the outlook at present not being too sunny for tenants following a number of recent “landlord friendly” judgments. These judgments have largely resulted from the courts adopting a strict interpretation of the break clauses in question.

The decision in December in the case of Canonical UK Ltd (Canonical) v TST Millbank LLC (TST)8 has highlighted the weight that the courts will place upon the need for parties to have contractual certainty, particularly when it comes to the question of whether tenants have properly complied with monetary payment pre-conditions.

The facts

On 17 February 2012, Canonical served notice on its landlord, TST, to terminate its underlease on 22 August 2012, pursuant to a break clause that allowed for termination upon service of not less than six months’ notice. A number of pre-conditions had to be satisfied for the break to take effect, in particular:

  1. Payment of rents up to and including the break date;
  2. No material breach of tenant covenants subsisting at the break date; and
  3. An additional payment (a reverse premium) by the break date of either three months’ rent (for a break date on or before the 14 August 2012) or one month’s rent (for a break date after the 14 August 2012).

The underlease provided for rent to be paid “yearly and proportionately for any part of a year..… equal quarterly payments to be made in advance on the usual quarter days”.

Canonical paid the whole of the June 2012 quarter’s rent in advance on 29 June, following receipt of an invoice from TST’s agents on 7 June.

The question for the court

Following the break date TST contested that the underlease had not been broken, as Canonical had apparently failed to comply with one of the pre-conditions, namely the payment of one month’s rent by way of reverse premium.

Canonical argued that rent was only due for the period up until the 22 August break date and that as such the balance of the sum that it had paid (being the whole of the June quarter’s rent) should be attributed to the reverse premium payment.

The issue to be resolved by the court was whether the payment made by Canonical on 29 June was sufficient to discharge the payment pre-conditions to the break clause.

TST argued that the full quarter’s rent was due on the June quarter day and that Canonical was therefore not in credit at the time of the break, so it had failed to pay the one month’s reverse premium.

Canonical asserted that the words ‘yearly and proportionately for any part of a year’ in relation to rent payments should be construed to mean that rent was only due for the period up to the 22 August break date. Thus, the balance of the money paid on 29 June, after deducting the rent due, should be taken as payment of the reverse premium, even though it was not stated at the time that payment was being made on this basis.

The decision

It was held that, on a proper construction of the underlease, the full quarter’s rent for the June 2012 quarter was payable, notwithstanding the reference in the underlease to rent being paid “yearly and proportionately for any part of a year”. Consequently, Canonical had not satisfied the reverse premium condition and the underlease had not been broken.

The court went on to confirm that allowing less than a full quarter’s rent to be paid when it is not definite that a lease will terminate is not conducive to contractual certainty for the parties.

The clear message for tenants is that they will need to be aware that the words ‘proportionately for any part of a year’, even when read in conjunction with a break clause, cannot be taken to reduce the rent payable just because the lease may end by virtue of a break notice. Mr Justice Vos reminded the parties that ‘‘one must also remember that leases are to be construed strictly, and that business certainty is desirable for all parties’’.