The economic climate has triggered numerous disputes concerning the exercise of break rights. In Quirkco Investments Ltd v Aspray Transport Ltd [2011] EWHC 3060 (Ch); [2011] PLSCS 284, the landlord relied on conditions in the break clause, that there were no arrears of rent or other sums due to the landlord and no other material outstanding breaches of covenant, to support its claim that the tenant’s lease was continuing.
The tenant had courted danger by returning a demand for an insurance premium to the landlord and requesting a revised demand to cover the cost of insurance up to the break date. The landlord could have ignored the letter, but helpfully chose to remind the tenant that the break clause contained preconditions that must be met for the break to be effective – and stated that the premium had been properly invoiced. It is not clear why, but the tenant did not pay. However, it subsequently transpired that the landlord’s own payment to the insurers had gone missing in the post.
The judge upheld the tenant’s argument that the landlord was entitled to payment only in respect of sums actually spent on insurance. Consequently, the tenant was not in breach of the conditions in its break cluse because the landlord’s insurers did not receive the landlord’s cheque until after the break date.
It is worth pausing here to note that the courts will interpret each lease individually. Consequently, it does not inevitably follow from this decision that landlords must pay their insurers before demanding insurance premiums from tenants. It is possible for a lease to require the tenant to pay the insurance rent before the landlord has actually paid the premium.
Practitioners will also be interested in the outcome of the tenant’s claim to recover rent paid in advance from the break date for the remainder of the quarter. The judge ruled that rent payable in advance is not apportionable at common law or under the Apportionment Act 1870. The landlord’s entitlement to recover the full amount of any rent due in advance, despite the subsequent termination of the lease before the expiry of the term, is explained by the fact that the contractual obligation to pay the rent arises before termination and the law of restitution does not operate to circumvent provisions in valid contracts.
Consequently, claims to recover rent referable to the period between the termination of a lease and the end of the quarter will depend on the terms of the lease. Unfortunately, reliance on words requiring tenants to pay “proportionately for any part of a year” or “a proportionate part” of the annual rent will not serve. These phrases deal with commencement and expiry dates that do not coincide with the quarter days, so that proportionate payments are required at both ends of the lease. No such proportionate payment would be required on the exercise of the break right, because the validity of the exercise of the option conferred by the break clause could not be ascertained on the preceding quarter day and because the lease made no provision for a proportionate payment or for the pro rata recovery of money attributable to the period after the expiry of the break notice.
Most break clauses require tenants to ensure that payments are up to date. Therefore, in the absence of provisions permitting payment of a lesser sum, tenants would be well-advised to pay in full to secure break rights. The tenant had a lucky escape on the facts of this case – but must now defend the landlord’s claim that the lease is still subsisting due to breaches of the repairing covenants in its lease.
Allyson Colby is a property law consultant
