Beware of falling foul of conditions on effective exercise of lease termination rights
22nd April 2012
Hard hit businesses are being dealt a double blow as landlords refuse to accept break clauses when rents have been late, and experts are now warning companies to check the small print before signing new leases.
The alert follows a court ruling where tenants were left unable to end a lease because they had not complied with the small print on interest payments for late rent.
Commercial leases are normally granted for a specified period, such as seven years or fifteen years. A long lease gives security both to the landlord and to the tenant, but being able to end the lease early gives flexibility in case circumstances change.
For this reason, many commercial leases contain a so-called break clause, which allows either the landlord or the tenant to terminate the lease early on an agreed date. But the lease is likely to say that the tenant can only terminate the lease if the rent is paid up to date and all the other tenant obligations have been complied with.
This was the case in Avocet Industrial Estates LLP v Merol Ltd, where Merol's right to end the lease early was on condition that all money due to the landlord under the lease had been paid at the break date. As tenants, Merol had often been late in paying the rent, and although it was up to date at the time of the break clause, the lease also stated that interest was payable on any rent paid late. Although Avocet had never demanded interest, when Merol tried to terminate the lease the landlord claimed that the tenant had lost their right, because interest had not been paid on the late rents.
Despite the interest amounting to just £130, compared with an annual rent of £67,500, the High Court judge came down on Avocets side, saying that the amount of interest being small made no difference and that the terms of the break clause should be strictly applied.
It is our view that the ruling in this latest case comes as no surprise in current economic conditions. The case may seem harsh, but although break clauses are becoming common, the right to end a lease early is still a privilege, so any conditions must be satisfied to the letter. In this climate, landlords want to hold on to tenants, so planning for break clauses needs careful thought - even before the lease is entered into. When negotiating terms with a landlord, it is vital for a tenant to be sure that they are going to be able to comply with all the conditions all too often we see a lease where the landlord goes for a general catch-all clause that is almost impossible to meet, as compliance could fall down over a piece of sticky tape left on the wall.
When it comes to exercising the right, the best thing is for a tenant to take a good look at their lease, check their payment history and if possible rectify anything so they are up to date before they give notice. What most tenants don't realise is that it is their responsibility to make sure they have strictly complied with all the conditions and that they cannot assume all is well just because the landlord has said nothing. The outcome for Merol gives a stark warning to tenants of what will otherwise happen.
Avocet Industrial Estates LLP v Merol Ltd  EWHC 3422 (Ch)
Please contact Mike Beadsworth via email@example.com