Breaking up is hard to do
Exercising a break clause in a lease is like running an obstacle race. Time of the essence in respect of dates and deadlines, and compliance with any pre-conditions is a must.
The litigation in Intergraph (UK) Ltd v Wolfson Microelectronics Plc [2012] EWHC 528 (Ch) followed a reorganisation which left premises surplus to requirements. The premises were let to the tenant by two separate leases. It served a notice to terminate one of its leases, but failed to serve a notice to determine the lease of its adjoining premises as well. Consequently, it was unable to satisfy one of the pre-conditions of the break clause, which required it to give vacant possession of both sets of premises at the same time. However, it could still satisfy all of the pre-conditions imposed by the break clause that it had exercised by physically separating the properties before the break date instead.
During subsequent correspondence, the parties reached an agreement that would enable the tenant to divest itself of the lease that it had tried to determine (but not the lease of the adjoining premises), without having to undertake any work itself. The tenant agreed to pay the landlord to do the work – but, due to an administrative oversight, failed to pay the agreed sum before the break date. The landlord claimed that neither of the leases had determined.
The tenant argued that the parties had reached an unqualified agreement for the determination of the lease that it had tried to determine, but the court upheld the landlord’s claim. It ruled that the parties had replaced one obligation with another, without relaxing the condition that time was of the essence for compliance with the terms of the break clause.
The agreement was drafted on the basis that it was still up to the tenant to satisfy the pre-conditions in the break clause in order to determine the lease. It did not state that the parties had agreed that the lease would determine in any event and there was no obvious commercial reason for the landlord to give up the benefits of a condition that time was of the essence for an entirely open-ended obligation that the tenant would pay an agreed amount at a time of its own choosing.
The judge distinguished Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd [2007] EWCA Civ 7 which concerned a compromise agreement on different terms. The tenant made a cash payment to the landlord to cover dilapidations well in advance of the break date, but failed to give vacant possession on time. However, the amount paid included a sum that was expressly referable to rent after the break date, to cover the period needed to repair the premises before re-letting. This suggested that the parties had agreed that the lease would determine on the break date in any event, which left the tenant liable only for damages for its failure to give vacant possession on time.
Intergraph highlights the importance of checking title deeds to ensure that nothing has been missed when exercising break rights in tenants’ leases. Agreements that confirm the efficacy of break notices should also be clearly worded to record the parties’ intentions.
Allyson Colby, property law consultant
