Breaking bad - tenants disappointed again

Posted: 26/08/2014

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Today, clients operate in a fast paced environment. Technological advances have changed the world we live in. Nearly everyone is a mobile worker as a result of the proliferation of smartphones and tablets. Business can be done almost anywhere; data can be stored in ‘the cloud’ and the internet has changed the way we work, shop and interact with each other.

Business models are also changing; StartUp Britain reported in January 2014 that British entrepreneurs created a record number of new businesses in 2013. Couple these factors with a challenging economic climate over recent years and it is not surprising that tenants need flexibility when it comes to their property requirements. Businesses do not know where they are going to be in five years’ time, let alone in ten.

In response, lease lengths have been shortening. The most recent IPD Lease Events Report published in November 2013 reveals that ‘the structural shift towards shorter leases continues’. New leases are, on average, now just 5.8 years long (two years shorter than lease lengths in 2003). Around a third of leases now contain break clauses.

Given the business drivers behind the need for flexibility, tenants will be dismayed to see just how often case law goes against them when it comes to exercising a break. This is especially so given that rents are likely to be priced to take account of tenants’ breaks rights. In the last few years alone, we have seen a number of cases go against tenants in:

• PCE Investors Ltd v Cancer Research UK [2012] EWHC 884 (Ch); [2012] P. & C.R. 5, the tenant lost its right to break because it failed to pay in full the last quarter’s rent;  
• Canonical UK Ltd v TST Millbank LLC [2012] EWHC 3710 (Ch); [2013] L. & T.R. 15, the tenant failed to pay a break premium equivalent to one month’s rent and so lost its right to break. The tenant argued that wording requiring rent to be paid ‘yearly and proportionately for any part of a year’ allowed the last rental payment to be apportioned between the two months’ rent up to the break date and the one month reverse premium. That argument failed;
• Avocet Industrial Estates LLP v Merol Ltd [2011] EWHC 3422 (Ch); [2012] L. & T.R. 13, the tenant lost its right to break through failure to pay undemanded default interest of just £130;
• NYK Logistics (UK) Ltd v Ibrend Estates BV [2011] EWCA Civ 683; [2011] 4 All E.R. 539, the break was lost because the tenant failed to give up vacant possession on the break date.

Tenants were given some hope in 2013. Two High Court decisions were decided in the tenant’s favour in:

• Siemens Hearing Instruments Ltd v Friends Life Ltd [2014] L. & T.R. 8, it was decided that a notice to exercise a break right was effective, despite the tenant not strictly complying with the formal requirements in the lease;
• Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2013] EWHC 1279 (Ch), the court implied a right into the lease entitling the tenant to a refund of overpaid rents.

Hopes have been dashed in 2014; the Court of Appeal has overturned both decisions. A third case, Arlington Business Parks GP Ltd v Scottish and Newcastle Ltd [2014] CSOH 77, has also gone against the tenant. In that case, the break was conditional on there being no breach of the tenant’s lease obligations ‘at the date of service of such notice and/or the termination date’. At the time the break notice was served, the tenant acknowledged that they were in breach of their repairing obligations. However, they were not in breach at the break date, the tenant having spent in excess of £1.3 million to put the premises in full repair. Despite this, the court held that the break notice was invalid.

Perhaps one ray of light for tenants in an otherwise gloomy picture is the court’s approach to the repayment of service charge monies on the exercise of a break. In both Friends Life Ltd v Siemens Hearing Instruments Ltd [2014] EWCA Civ 382; [2014] 2 P. & C.R 5 and Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2014] EWCA Civ 603, the court indicated that (in line with Brown’s Operating System Services v Southwark Roman Catholic Diocesan Corporation [2007] EWCA Civ 164; [2008] 1 P. & C.R. 7), tenants should be entitled to the repayment of advance service charge payments made but not spent by the landlord before the break date.

On balance, however, it would appear that the scales have tipped back in favour of landlords. Given that the courts continue to strictly construe break clauses, tenants need to continue to press for shorter leases, negotiate unconditional breaks wherever possible and watch the drafting carefully.

This article was published in The Landlord & Tenant Law Review in August 2014

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