Breaking news – A dozen recent break option cases

1. Hexstone Holdings Ltd v AHC Westlink Ltd [2010]

The Tenant, AHC Westlink, entered into a merger with the Stobart group but remained a separate company following which it served a break notice signed on behalf of Eddie Stobart Ltd. The Court found that the notice was invalid. The Court said that the lease contained a formal requirement that the notice be given by the Tenant and, in any event, the notice was misleading in that it was unclear in what capacity Eddie Stobart Ltd had been acting.

2. MW Trustees Ltd and others v Telular Corporation [2011]

If a recipient chooses not to stonewall the giver following receipt of a break notice and responds to them the recipient risks an inadvertent waiver of any defects in the notice.

3. Avocet Industrial Estates LLP v Merol Ltd [2011]

This case is probably the most shocking of the recent break clause cases.

The Landlord claimed the tenant had failed to comply with the conditions for an effective break. The Tenant had to pay a sum equal to 6 months’ rent and all sums due under the lease. The Landlord contended that it had to be in receipt of cleared funds on the break date such that a payment by cheque, hand delivered the day before, was insufficient. It also submitted that the Tenant had been persistently late in paying its rent and that it still owed default interest of £130 on the break date.

In relation to the first argument the Court found that the parties had an implied agreement displacing the general common law rule that a party had to pay its debt by a tender of legal currency, and that a cheque was not legal currency. Such an agreement was inferred from a course of conduct where there had been a practice of making payments by cheque and those cheques had been accepted. Acceptance of the cheques resulted in payment of the sums due with effect from the date when they were tendered so long as they were in due course met on presentation. The Landlord would need to give timely notice to bring such an implied agreement to an end.

In addition, even if the Landlord had been entitled to reject the cheque, it had not done so promptly, having allowed 3 weeks to elapse, and so was taken to have accepted it. Tenants are, nevertheless, advised if a break premium has to be paid that payment should be made in cleared funds in good time before it is due.

To the surprise of many, the Landlord was successful with its other argument. The Tenant’s liability to pay default interest on late payments was not conditional on the Landlord making a demand for such interest. It was a debt that fell due for payment from day to day as it accrued. In what the Court acknowledged was a harsh decision, the Tenant was on the hook for a further £300,000 in rent over the rest of the term, despite the arrears owed on the break date being negligible.

The Landlord was only able to overcome the Tenant’s estoppel argument because the Landlord was not aware of the arrears that invalidated the break. On other facts it may be impossible for a Landlord to assert that it did not know that a Tenant had made a mistake and was not seeking to take advantage of that. It was suggested that it might be possible that an estoppel argument could succeed if a Landlord did not tell its tenant of its error and give the Tenant the opportunity to correct it.

4. Crossco No 4 Unlimited v Jolan Ltd [2011]

Following a demerger, one company became the Landlord of another now unrelated company. The Landlord exercised a break option. The Tenant applied for a new lease under the Landlord and Tenant Act 1954, which the Landlord opposed on development grounds. The Tenant argued that the Landlord should be prevented from exercising the break because an estoppel had arisen from the demerger negotiations. The Court decided that the Landlord had never given any assurance that it would not exercise the break and, therefore, could do so.

5. Quirko Investments Limited v Asprey Transport Limited [2011]

The break clause stated that a notice would only be effective if at the time of its expiry there were “no arrears of rent reserved or any other sums due.” Arrears of insurance rent were said to be sufficient to invalidate the break clause, provided they were properly due under the terms of the lease. The Tenant successfully argued that the insurance rent had not fallen due before the break date as the Landlord had not, as a matter of fact, paid the premium when the insurance rent was demanded, which was a precondition for liability under the drafting of that particular lease.

6. NYK Logistics (UK) Ltd v Ibrend Estates BV [2011]

A Tenant’s break was conditional on all rent being paid and vacant possession being given. NYK moved out with 5 weeks to spare and began remedying dilapidations despite that not being a condition of the break. NYK arranged for security during the works as it was concerned about vandalism. NYK proposed to return the keys on the break date and pay no more rent but would secure the site for a further week whilst it finished its repair work. Ibrend did not respond to the proposal. The premises were empty but for the security personnel at midnight on the break date. After the weekend NYK returned to the premises to finish its works. Ibrend claimed that vacant possession had not been given.

Rejected the claim that the security guards were a substantial impediment to Ibrend’s use of the property. Ibrend also raised an argument regarding NYK’s chattels but that failed because the chattels did not substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property.

Accepted Ibrend’s claim in respect of the workmen and held that NYK was using the premises for its own purposes. The Court of Appeal said that NYK should have moved everyone out on the break date, including its security guard, and told Ibrend on that date what it was doing and that it would on the same day deliver the keys to Ibrend’s agent.

7. PCE Investors Ltd v Cancer Research UK [2012]

The Tenant had to pay the rents reserved and demanded up to the termination date. PCE paid the rent for the period between the last quarter day and the intended break date rather than for the whole quarter. The Landlord sent a demand for the entire quarter’s rent. PCE sought confirmation from the Landlord that it had paid the correct sum but the Landlord did not respond.

The Court decided that all obligations under the lease subsisted until its termination. PCE had agreed to pay its rent in advance. The Apportionment Act 1870 does not apply where rent is payable in advance. Therefore, a full quarter’s rent was due on the last quarter day before the intended break date. It was not certain that the lease would terminate when that rent fell due. PCE, therefore, failed to meet the condition that it must pay the rents reserved by the lease as it only paid for the period up to the intended termination date. Accordingly the lease would continue for another 4 years at a cost of £760,000.

The Court considered the Avocet case (no. 3 above). It said that PCE knew from the Landlord’s demand and subsequent silence that the Landlord expected the full amount of the rent. There was said to be no evidence to support the assertion that PCE believed the reduced rent only was payable. The Court confirmed that there was no general notion of good faith and no general proposition that where one party perceives another making a mistake its has to correct it.

8. Gemini Press Ltd v Cheryl Lindsay Parsons [2012]

A right to break contained in an assignment agreement was limited to the first assignee and was not assignable to further assignees. The clause specifically named the first assignee in contrast to the rest of the agreement, which referred to the “Assignee”, a term defined as including successors in title. It was unnecessary for the break clause to use the word “only” when referring to the named first assignee in order for the right to be personal.

9. Intergraph (UK) Ltd v Wolfson Microelectronics Plc [2012]

The Tenant was unable to carry out certain works to satisfy one of the preconditions to the exercise of a break option. The parties reached an agreement that would enable the Tenant to divest itself of the lease without having to carry out the works. The Landlord would do the works instead provided the Tenant paid for them before the break date. Due to an administrative oversight, the Tenant failed to pay the agreed sum before the intended termination date. The Landlord claimed the lease was not determined and the Court agreed. It held the parties had replaced one obligation with another, without relaxing the condition that time was of the essence for compliance with the terms of the break clause.

A reminder that if it is ever possible to reach an agreement the first point for the party wishing to determine the tenancy should be that the lease will definitely come to an end whatever else happens. It is of limited value to replace one set of preconditions for another.

10. Canonical UK Ltd v TST Millbank LLC [2012]

Even if rent is referred to as being payable “proportionately for any part of a year” the Tenant will still have to pay the full quarter’s rent on the last quarter day before the intended break date if it is not certain that the lease will end on the intended termination date.

11. Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2013]

If a break is only conditional on an absence of arrears without any further conditions: the Tenant’s obligation on the relevant quarter day would be to pay only an apportioned part of the rent. However, the cautious approach is still to pay the rent for the full quarter to ensure the operation of the break.

Despite having received an invoice in respect of rent only up to the break date, Marks and Spencer paid the rent for the whole of the last quarter. It wrote to the Landlord following the end of the lease asking for repayment of the sums that related to the period after the break date. The Court decided that there was an implied provision in the lease entitling Marks and Spencer to recover the overpayment. A reasonable person reading the lease would expect that if the break was effective mid-quarter no rent would be payable for the period after that date. The Landlord was obliged to pay back the overpaid rent and reimburse insurance rent relating to the post-break period.

It was relevant that the break was only effective if a break payment equal to a year’s rent was paid on time. This showed that the parties had thought about the compensation the Landlord should receive if the break were exercised. It made it unlikely that the parties intended the Landlord to also be entitled to retain the full amount of the final quarter’s rent.

The justification for the decision will not apply in all instances. Without an implied term a Tenant may seek to establish an entitlement to restitution. Although it did not need to, the Court decided that the consideration for the last quarter’s rent had not totally failed and should not be divided on an apportionment basis. As a result, Marks and Spencer’s alternative restitution claim was unsuccessful.

11. Siemens Hearing Instruments Ltd v Friends Life Ltd [2013]

Introduced some uncertainty regarding the position of express break option requirements. Held that a Tenant’s break notice was valid even though it did not comply with a requirement that any notice be expressed to be given under s24(2) of the Landlord and Tenant Act 1954.

In the circumstances the inclusion of the reference would have been pointless. It had been included in the lease to deal with an unresolved legal issue since addressed in case law. The Court said there was no inflexible rule that such requirements must be strictly complied with and, accordingly, non-compliance did not invalidate the notice.

The judgment suggested that break notices should incorporate the intended result of a failure to meet an express requirement, as that will no longer be assumed to be invalidity in every case.

Simon Hartley
e: simon.hartley@rlb-law.com
t: 020 7227 7476
© RadcliffesLeBrasseur

November 2013


Disclaimer

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