Heading for certain breakdown?

Breaking the chain iStock 000005716223XSmall 146x219Break clauses in leases can trap the unwary landlord or tenant. Marie-Louise Gobbi reviews the recent case law.

I started researching this article with the assumption that it would be a fairly standard round-up of recent cases concerning the tricky operation of lease break options.

Whilst real estate litigators are familiar with the pitfalls of validly effecting commercial lease breaks, non-specialist landlords and tenants, for whom property law is an unknown and often unwelcome consequence of their ownership or occupation of business premises, can often fall foul of crafty or careless break clause drafting, and can struggle to properly operate breaks. In the difficult economic climate of recent years, many tenants have sought to extricate themselves from lengthy lease terms. I therefore felt sure that there would be plenty of new cases to flag to clients and colleagues to remind them of some of the key traps of which to be aware.

The strict approach

One such case is that of Avocet Industrial Estates LLP v Merol Ltd [1] in which a tenant thought it had made every effort to comply with pre-conditions to the break option, including the condition with which this article is concerned: that a break notice would have no effect if, at the break date, any payment due under the lease remained outstanding. Prior to the break date the tenant tendered payment to the landlord of all monies which it considered were due under the lease, along with a letter in which it stated that it was not aware of any breach of the lease or any amounts outstanding.

In fact, throughout the lease term, the tenant had been late in paying rent and other sums. The lease provided for interest to be payable at an ascertainable rate on overdue sums. When the tenant sought to exit the property in reliance on the break notice, the landlord contended that, as interest on late payments was outstanding, the break pre-condition had not been complied with, and the lease was continuing. The court agreed.

As is often the case, the lease did not require the landlord to notify the tenant of, or demand, certain sums due under the lease, including interest. The landlord was not obliged to respond to the tenant's letter, and as it did not respond, no estoppel arose to prevent the landlord from alleging invalidity of the break.

The Avocet case is, therefore, another of the stark warnings which we have come to expect about the strict operation of break clauses and the unforgiving approach of the court to parties who do not absolutely comply with pre-conditions.

Similarly, PCE Investors Ltd v Cancer Research UK [2] reiterates that, where rent is payable in advance (here, quarterly in advance), and a break clause condition requires all sums to be paid up to lease termination, the tenant must pay the full period's (here, the full quarter's) rent in advance in the usual way, notwithstanding that the break date falls mid-period/quarter. The tenant paid an apportionment of rent to the break date only; the break was therefore held to be invalid; and the lease is continuing. It is worth noting, though, that there is an appeal outstanding on this case and it will be interesting, in due course, to learn the outcome.

So far, so good; but the remainder of relevant recent cases seem to reveal the beginnings of a slightly different approach.

A breakdown in certainty

In MW Trustees Ltd v Telular Corp [3] the tenant served a break notice, by special delivery, on the landlord's predecessor rather than on the landlord itself; and sent a copy of the notice, by email, to the landlord's agent. The tenant sent the notice by the correct method but to the wrong person; and by an incorrect method to a representative of the right person. The landlord's agent replied to the email stating that it accepted the attached notice.

I would previously have confidently advised that both attempts to break were invalid. However, surprisingly, the court held that, following the email, the landlord was taken as knowing that the tenant was seeking to exercise the break clause and that it was estopped from alleging invalidity due to defects in both form and service by virtue of its agent's accepting response.

Another case to introduce uncertainty in the context of break operations is Quirkco Investments Ltd v Aspray Transport Ltd [4]. Here, in amongst other points, there was a dispute over alleged insurance rent arrears at the break date. The tenant argued that, if there were insurance rent arrears, then they were of an amount so trifling that the 'de minimis' principle should apply, so as not to render the attempted exercise of the tenant's break option invalid.

Confusingly, the judge gave two apparently conflicting statements: commenting, on the one hand (and in the traditional manner), that a break pre-condition in a lease that a tenant must pay all sums due is absolute; and on the other, that even if the de minimis principle applies in some more extreme cases, it did not apply here. The judge's latter comments surely introduce very real uncertainty: what is an extreme case? What is a trifling amount? Are payment pre-conditions absolute or subject to de minimis, as the two are surely mutually exclusive?

Quirkco also raised the question of apportioning rent and other payments in the run-up to a break date. The law is clear that, where rent is payable in advance and where a break date falls within a rent period (for example, where rent is paid quarterly in advance and a break date falls mid-quarter), the full quarter's rent must be paid on the quarter day in advance in the usual way – that is, the tenant is not entitled to pay a reduced, apportioned sum to the break date only – unless the lease expressly allows such apportionment. The law of unjust enrichment does not apply to require the landlord to forgo or repay any such 'windfall' paid in advance in respect of the time after the break date to the end of the rent period.

The court spelled out that, in a tenant's claim that apportionment was allowed, or that refund should be made of the sum paid relating to the post-break period, it was not sufficient to rely on wording requiring a tenant to pay "proportionately for any part of a year" or to pay "a proportionate part" of the rent. Tenants and their solicitors should therefore do their best to negotiate very clear, express apportionment/refund provisions in their leases in future.

Serving up a surprise

Finally, the Court of Appeal case of Ener-G Holdings Plc v Hommell [5] has decided that service of a legal notice by a means not specified in the services of notices clause in the contract was good service.

The contract contained a provision that any notice served under it may be served by personal service or by recorded delivery. On 30 March 2010 a process server attempted personal delivery of a notice at the home address of the defendant and, when the defendant was not home, the notice was left in the porch. On the same day an identical version of the notice was sent by recorded delivery, and deemed served (in accordance with the contract) two business days later. The contract also provided that any proceedings had to be started within a certain time after service of the notice.

The defendant argued that the hand-delivered notice was valid service, so that the time limit for proceedings began running straight away, such that subsequent court proceedings were served on him out of time. The claimant relied on deemed service of the posted notice, alleging that the hand-delivered notice had not actually been personally served as required by the contract.

Perhaps to reach a fair result in the unusual circumstances of the case, rather than adopting a more traditional approach to interpretation of such clauses, the Court of Appeal found that:

  • personal service had not been achieved; but
  • that the service of notices clause in the contract was permissive only, not exclusive, such that the hand-delivered notice had been good service in any event.

This case will call into significant uncertainty the service of notice provisions in countless leases and contracts. It will, I think, therefore serve only to further complicate this already tricky area.

While a dilution of strictness in the court's approach to preparation and service of break notices may appear, on the face of it, to be a welcome change from the often harsh, apparently un-commercial decisions in the past – therefore possibly allowing tenants to get away with more mistakes and defects than has hitherto been the case – my concern is that any breakdown certainty can result in advisors being less able to confidently assist clients in dealing with their lease terms as they so wish. Increasingly, decisions will be fact/circumstance-specific, and clear general principles in relation to breaks and service of notices will be more difficult to draw.

Marie-Louise Gobbi is an Associate at Walker Morris. She can be contacted on 0113 283 2500 or by This email address is being protected from spambots. You need JavaScript enabled to view it.. Marie-Louise regularly contributes articles and updates to reach.... ®, the free Walker Morris knowledge database and alerter service.

[1] Avocet Industrial Estates LLP v Merol Ltd [2011] EWHC 3422 (Ch)

[2] PCE Investors Ltd v Cancer Research UK [2012] EWHC 884 (Ch)

[3] MW Trustees Ltd v Telular Corp [2011] EWHC 104 (Ch)

[4] Quirkco Investments Ltd v Aspray Transport Ltd [2011] EWHC 3060 (Ch)

[5] Ener-G Holdings Plc v Hommell [2012] EWCA Civ 1059