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have been made until the date that payment was actually made. There was nothing in the wording of the clause to suggest that there was a precondition that the landlord must first serve on the tenant a demand for such default interest. As the annual rent and other sums due under the lease were not paid by the due date, the tenant owed the landlord default interest which was calculated in accordance with the lease terms. It is important to note that the landlord had not made any positive statement, express or implied about its entitlement to default interest in relation to late payments. In some circumstances, silence or inaction can constitute a representation that you are accepting the position. If another party relies on that representation to their detriment you can be prevented from taking any alternative action (known as estoppel). In this case: the tenant believed that he had paid all sums due and the landlord knew of the belief because the tenant had told the landlord. If the landlord had told the tenant that
the tenant owed default interest it is more than likely that the tenant would have paid it to avoid an argument about its ability to end the lease. However on the evidence, the landlord did not know that the tenant’s belief was wrong before the end of the break date and did not take advantage of the tenant’s mistake. The landlord had not considered payments of default interest by the end of the break date and only took the point as a result of legal advice received after the break date. The tenant could not therefore claim estoppel. The Court admitted that the result in
this case was a harsh one as the amount of default interest owed was very small and recognised that the conditions attached to the break clause represented “something of a trap for a tenant”. Wording relating to the payment of
default interest is commonly seen in leases and this decision will have implications to many landlords and tenants. Provided that they have not misled the tenant in any way, landlords may be able to rely on such a provision to defeat the tenant exercising its break clause.
OTHER FACTORS
Another key factor which a tenant should bear in mind is whether the requirement for vacant possession has been met. In NYK logistics (UK) Limited v Ibrend Estates BV (2011) EWCA Civ 683, a tenant took a lease of a warehouse which contained break rights at the end of 12 and
The tenant had not done anything to demonstrate that it was giving up possession as it didn’t return the keys, but only offered to do so.’
was only maintaining a presence for security purposes (effectively for the landlord’s benefit) and to carry out work which was agreed with the landlord. Shortly afterwards, the tenant received a
letter from the landlord’s lawyers stating that the lease had not been effectively ended because the tenant had not given vacant possession on the break date. The Court of Appeal held that the failure
to hand over the keys, the retention of control of the premises via the security personnel and the presence of workmen beyond the break date were all inconsistent with providing vacant possession. Furthermore, the tenant had not done anything to demonstrate that it was actually giving up possession as it did not return the keys but only offered to do so. The break right was lost. The tenant should have returned the
keys and remove all personnel and chattels from the property. The following day, it should have agreed with the landlord to have permission to return to the property to carry out the works as licensee. The failure to comply with pre-
18 months of the term. The break clause was subject to the tenant complying with several pre-conditions, one of which was to give vacant possession to the landlord on the break date. Notice was served in accordance with
the lease and the landlord drew up a schedule of dilapidations in response. A week before the break date, the landlord and tenant finally agreed the works which the tenant needed to undertake to the property. The tenant realised that the works it was undertaking (which were not a pre-condition to the break) would not be completed by the break date. The tenant moved out of the property and made a proposal to the landlord that it would carry out the outstanding works in the week following the break date but offered to hand back the keys and it would continue to pay for security guards at the property. The landlord did no respond to the tenant’s suggestion. On the break date, the tenant left
messages with the landlord asking where the key should be delivered but no response was forthcoming. The tenant had given up occupation of the premises and it
conditions in a break clause can lead to significant ongoing liabilities. The cases also raise the question whether, as a tenant, it is always appropriate to agree to vacant possession and payment of all sums under the lease as an obligation in a break clause. The Code for Leasing Business Premises in England and Wales 2007 (“the Code”) recommends that the only preconditions to a tenant exercising a break clause should be: The main rent is paid up to date;
• •
• The tenant is to give up occupation; and
no sub-leases remain in force. Disputes about the state of the premises,
what has been left behind and/or removed should be settled at a later date, as is the case on normal lease expiry. These decisions have influenced the approach in practice to agreeing heads of terms and lease negotiations. What is clear is that there are questions
being raised in the real estate industry as to whether it is now time for a review of the Code to require higher standards and better business relations between landlord and tenant which is surely required, particularly in the current market to avoid such scenarios being replicated?
Joanne Wright is a Senior Associate at Thomson Snell & Passmore.
Add your own opinions to the debate:
www.propertydrum.com/articles/breakclause
PROPERTYdrum APRIL 2012 61
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