Should a Tenant who breaks its Lease midway through a quarter, having (a) paid the break fee (over £900K) which is specified in the Lease and (b) paid the full quarter’s rent be entitled to a refund of the rents it paid beyond the break date? The Court of Appeal has just decided that unless the Lease contains clear and express wording to the contrary, the answer is no. So the Landlord gains a windfall.
This decision is clearly very bad news for Tenants.
It has been settled case law for some time now that a condition in a break clause requiring the rents to be paid up to date means that (in the absence of express wording to the contrary) the rents had to be paid for the full quarter and not just to the break date. For instance, if the break date is on 1 July, the Tenant must pay the rent from 24 June to 28 September in order to comply with the condition, if the Tenant does not do so, the operation of the break is ineffective and the Lease will continue.
The first instance decision of this case gave Tenants hope that they could claim a refund in such circumstances, although many people thought the case was unusual because the break clause also contained a condition that, in order to successfully operate the break , the Tenant had to make the payment of £900K.
This Court of Appeal decision though firmly puts the Landlord back in the driving seat. The Court of Appeal felt that the Lease, read as a whole against the relevant background, could not reasonably be understood to imply a term enabling the Tenant to claim back the rents that were paid beyond the break date.
It will be interesting to see if there is a further appeal. Objectively, if a Lease requires a break fee to be paid would a Landlord really expect to also be able to keep the rents that were paid for the period after the break date? Many break dates are calculated by reference to the date that the Lease was granted, which is usually the first date that both parties are ready to complete. So, if a Lease were granted on 23 June with a break on its third anniversary, which was conditional on payment of rent, the Landlord would not receive any windfall at all. Whereas a Lease granted a day later with a break on its third anniversary, which was conditional on payment of rent, would result in the Landlord being entitled to retain a full quarter’s rent.
This case demonstrates yet again the complications and dangers of break clauses. If you have any thoughts or issues on break clauses, please let us know.
Mark Lavers – 15 May 2014
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