Tenant break options are common in commercial leases, allowing tenants to end a lease early, subject to the tenant giving notice to the landlord. These options have long been a feature of commercial leases but recently a practical issue concerning payment of rent is now the subject of an appeal to the UK’s highest court, the Supreme Court.
The practical problem is this: if a tenant break option is to take effect on, say, 1 September but the tenant is required under the lease to pay rent for the period 28 August to 27 November, is the tenant allowed to pay only 5 days’ rent to 1 September rather than the 91 days’ rent to 27 November? The answer may seem obvious – that, because the tenant would only receive the benefit of 5 days’ occupation, the tenant should only pay 5 days’ rent for the period to 1 September. Many landlords and tenants (at least in our experience) follow this practice.
In the 2014 English Court of Appeal decision of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd, (and one very likely to be followed in Scottish law), it was decided that a tenant attempting to exercise a break option should have paid rent through to the end of the rent payment period – i.e. to use our example, through to 27 November. Because, however, the tenant had apportioned rent as at the date of exercise of the break notice, the tenant had not complied with the terms of the lease. Worse, because the lease said that the tenant could exercise the break only if the tenant had fully complied with the lease, the Court of Appeal held that the tenant break notice was ineffective. The consequence was that the lease would run for the full period of the lease.
Although this might seem highly unfair to a tenant, there is logic to the Court’s decision. Often – but not always – a tenant may be required to make a payment to the landlord in exchange for being allowed to exercise a tenant break clause. Where the lease is silent – as in the case in question – it is not clear whether the landlord was or was not expected to receive a payment in the form of rent for the full rent payment period (i.e. for the 91 days rather than the 5 days used in our example).
The lesson here is that a tenant must check very carefully the terms of the lease and, if necessary, pay the full rent due for the rent period, even if this means that the tenant ends up paying irrecoverable rent beyond the date when the break takes effect.
The Supreme Court is expected later this year or early next to reach a decision on this issue – and its ruling is likely to be applicable to leases in both England and Scotland.
However, there remain other cases where courts have decided that a tenant was not entitled to break a lease, even though the notice itself was validly given to the landlord. In the case of Avocet Industrial Estates LLP v Merol Limited (2012) the tenant tried to exercise a break option. The break option was, however, conditional on the tenant making payment of all monies due under the lease. In this case, the tenant had a history of late payment of rent and the lease required the tenant to pay interest on late payment. Even though the landlord had never asked for payment of interest, because the tenant had not paid interest, the Court decided that there were outstanding payments due under the lease and the tenant’s break option was held not to be valid. In another case, Canonical UK Ltd v TST Milbank LLC (2012) the tenant had taken care to pay rent for the full rent payment period but inadvertently overlooked another clause in the lease and its attempt to break the lease was held to be ineffective.
The lessons from the above are clear:
- when first entering into lease, your solicitor should pay close attention to the wording of the tenant break option – is it conditional or not on payments or compliance with other clauses in the lease?
- if the break clause is conditional, the tenant needs to take the greatest care to comply fully with the break option conditions or the break option will not be valid
- as a related point, where the tenant wants the landlord to treat a rent deposit as the equivalent to payment of the last instalment of rent, the tenant must get the landlord’s express written consent in advance for this
There are other considerations when drafting or exercising tenant break options. If you need assistance with these points, please contact us and we will be happy to help.
Michael Dewar, Commercial Property Partner