Break clause update - Canonical UK Ltd v TST Millbank LLC

Posted: 27/02/2013

2012 brought a number of interesting break clause cases to the courts. At the very end of the year there was one further decision on a contentious break clause which raised two key practice points:

• where rent falls due before a break date, the tenant is usually liable to pay it in full with no apportionment up to and including the break date; 
• a tenant who decides to apportion the rent when exercising a break right, risks invalidating the operation of the break. 

In Canonical UK Ltd v TST Millbank LLC the tenant had served a valid notice to break their lease. The break clause included the following conditions: 

• the rents due under the lease were to be paid up to and including the break date; 
• the tenant was to pay to the landlord, on or before the break date, a sum equivalent to one month’s rent.  

The break date was in the middle of the June quarter and the landlord invoiced the tenant as usual for the full June quarter’s rent which the tenant then paid. However, the tenant did not pay the lump sum payment of one month’s rent.

The tenant argued that as the break date fell part way through the June quarter, only two months' rent was due so the lump sum payment could be taken from the balance of the rent paid on the June quarter day.

Was the tenant in a position to apportion the rent?

Under the terms of the lease, the tenant had to pay 'yearly and proportionately for any part of a year the yearly rent…by equal quarterly payments to be made in advance on the usual quarter days in every year the first such payment or a proportionate part thereof…to be paid on the rent commencement date'.

The tenant argued that 'yearly and proportionately for any part of a year' meant that the rent was only due for the period up to and including the break date. The court dismissed this argument and confirmed that this wording deals with the situation where the start and end dates of the term fall either before or after a rental quarter date. The wording does not extend to the situation where the lease comes to an end by virtue of a break clause.

If apportionment of the rent was envisaged, then the lease needs to specify that this is the case. One reason why apportionment is not automatic in the case of a break clause is that there is no guarantee a tenant will comply with the terms of the break and terminate the lease at the expiry of the break notice.

Could the balance of the rent have been used towards the premium payment?

The tenant also argued as a second point whether, if they had won on the apportionment point, the balance of the rent could be treated as a reverse premium which had to be paid to the landlord as a condition of the break.

The court ruled against the tenant on this point also. The court explained that in this case the payment was clearly attributed to the rental invoice as it quoted the invoice number in the payment reference. The landlord had no way of knowing that part of the payment was intended to be the reverse premium.

On both arguments the tenant failed to show that the break was valid and therefore the lease continued.

This most recent case on break clauses serves as a reminder of the strict approach that the courts take in interpreting break clauses. It also clearly sets out the position on the apportionment of rent in leases. Unless expressly set out in the lease, the rent is not apportioned up to and including the break date and the full rent for the period including the break date should be paid prior to the break date.

As an additional practice point, a well-advised tenant should ensure that a reverse premium payment is clearly marked as such when making payment to the landlord.

This is another example of the importance to a tenant of strictly adhering to the provisions of a break clause in their lease and seeking legal advice where necessary.

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