Break clauses - strict interpretation?

Posted: 27/02/2012

Two recent court cases have yet again brought into question the way that break clauses are interpreted by the courts. The cases, involving tenant break rights, resulted in very different outcomes for the tenants and highlighted the difficulty in validly exercising a tenant break.

Recent decisions 

The High Court decision in Avocet Industrial Estates LLP v (1) Merol Limited and (2) Tudor Rose International Limited involved a tenant's right to break the lease on a specific date on the condition that all payments due under the lease had been paid by that date. This is not an unusual condition. The court held that the break had not been validly exercised on the ground that the tenant had not paid outstanding interest due under the lease for payments of rent that had been paid late in the past, despite the fact that the interest had never been demanded.

The decision resulted from a very strict and landlord- friendly interpretation of the lease, with the court explaining that the landlord's entitlement to interest was not dependent on it having served a valid demand. In addition, as it was practically possible for the tenant to calculate the interest, it was held to be properly due under the lease.

In another decision, QuirkCo Investments Ltd v Aspray Transport Ltd, the High Court found in favour of the tenant who had not paid sums that were demanded by the landlord. On the facts of the case, the landlord invoiced the tenant in November 2010 for the insurance premium relating to the premises for the period 1 December 2010 to 30 November 2011. The break date was 18 December 2010.

The tenant did not pay the premium as it included the period after the tenant had vacated. The court heard that at the break date the landlord had not actually expended any money in renewing its insurance policy. As the lease provided that the tenant was to pay such sums as the landlord may 'from time to time expend in insuring', the court found that the landlord should not have demanded the insurance. Therefore the tenant was not in breach and the exercise of the break was effective.

The pitfalls for a tenant

It is alarming to consider that when heads of terms are drafted it is rare for the reference to the break clause on the terms sheet to also refer to it being conditional. The idea is usually that the tenant wants to be able to terminate early. The quid pro quo is that they usually pay a slightly higher rent at the outset for that right in order to compensate the landlord. The landlord's lawyers ignore this and try to make it difficult for the tenant to achieve the aim that was originally agreed, arguing with some merit that rent should be paid first. Of course rent is often defined widely to include payments other than just 'rent'. The consequences can be reasonably harsh when the original intention seems to be frustrated by what might be a very technical and possibly minor oversight.

These decisions highlight the importance of a tenant examining the terms of its break clause carefully well in advance of the date on which notice should be given and, if necessary, seeking professional advice before exercising the break. In particular, the cases show that a tenant will need to consider the terms of the lease as a whole, not simply the break clause in isolation.

Tenants should also consider the Lease Code when negotiating a break clause in a new lease. The Code recommends that the only conditions for a break should be payment of the rent up to the break date and giving up occupation free from any third party right to occupy. Although the Code is voluntary, it can be used to bolster a tenant's negotiating strength.

Strict interpretation to remain?

Historically the courts have given the benefit of the doubt to landlords when interpreting the terms of break clauses, putting landlords in a strong position. However, the second case may indicate a shift towards a more tenant-friendly approach to interpreting break clauses.

In the future, the courts may be persuaded to take a more flexible, tenant-friendly approach to interpreting break clauses and avoid the harsh decision in the first of the cases dealt with above. However, in light of these two decisions, tenants should beware and consider the details of break clauses very carefully before exercising a break. No doubt the best scenario is to negotiate an unconditional break, but that is easier said than done. 

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