Breaking a lease is hard to do

27 June, 2014

Break clauses in leases are frequently featured in the law reports. This article provides a recap of recent cases regarding the extent to which break conditions need to be complied with and whether rents need to be refunded if they are paid in advance of the break date, but relate to the period after the break date.

 

All conditions need to be satisfied – no matter how meaningless

 

In Friends Life Ltd v Siemens Hearing Instruments Ltd [2014] EWCA Civ 382, Siemens’s break clause stated that any notice exercising the right to break “must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954”. On serving the break notice, Siemens complied with all the other requirements of the break clause, but did not mention section 24(2) or the 1954 Act. Nevertheless, the High Court decided that the break notice was valid, leaving uncertainty and a wider margin of error to effectively serve a break notice in its wake.

 

The purpose of the wording required to break Siemens’s lease was to try to prevent tenants from simultaneously exercising a break clause and requesting a new tenancy under section 26 of the 1954 Act at a lower rent, an attractive possibility in a falling market. At the time Siemens entered into its agreement for lease it was not clear whether this was possible: the High Court case of Garston v Scottish Widows Fund [1996] 1 WLR 834, which said it was not, was subject to appeal. Once the courts confirmed that tenants could not do this the wording fell into disuse.  Friends Life appealed against this decision.

 

Despite the fact that the wording was meaningless at a practical level, the Court of Appeal found that its omission meant the break notice was invalid, a welcome return to the widely understood legal position. Siemens is now tied to a lease that will run until 2024, at a cost of £325,000 a year.

 

Practical advice

 

The implications are obvious: it is essential to follow every single requirement of a break clause closely. The courts will ask whether the requirements have been met, and if they have not, the break will not work: it is not enough to almost satisfy the requirements. The consequences of failure to comply are irrelevant – all the court is interested in is whether the parties have done what they agreed to do.

 

Accordingly, on receiving a break notice well-advised landlords will carefully consider whether their tenants have fulfilled all the break clause’s requirements, and challenge any break notices that appear less than perfect.

 

Can I get a refund?

 

As well as considering whether break clauses’ requirements have been complied with, another issue which will be of interest to both landlords and tenants is whether rents paid in advance of the lease break date, but which relate to a period after the break date, need to be refunded to the tenant.

 

It is relatively common for break clauses to include a condition which requires rent to be paid up to the break date. This means that (in the case of quarterly rents) the full quarter’s rent due on the rent payment day immediately before the break date must be paid in full even though part of that rent may cover a period after the break date. The same applies where the break date coincides with a rent payment day.

 

Despite much debate on the point within the profession, the widely accepted view was that the law did not afford a tenant a right to a refund of rent paid in advance for the period after the break date unless the lease clearly stated that the landlord was obliged to make such a refund.

 

Over the years this principle has resulted in some fairly harsh consequences and decisions for tenants; worst case scenario being where the break date falls either on or just after a rent payment day, the break clause contains a condition requiring payment of rent up to the break date and there is no express landlord obligation in the lease to make a refund.

 

In that situation, a tenant who wanted to be sure that the break right was validly exercised and the lease terminated (so as to end the tenant’s liabilities under the lease as at the break date) would unfortunately have to make payment of the full amount of rent due on the previous rent payment day and then try to recover an appropriate refund from the landlord afterwards.

 

That was what Marks and Spencer Plc did in a recent case – Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2013]. The M&S lease break clause required rents to be paid up to the break date as a condition to the break, but contained no express obligation on the landlord to refund any advance rent paid which related to the period after the break date.

 

Therefore, so as to be sure that the break right was validly exercised, M&S duly paid the full quarter’s rent due before the break date and then sued for an appropriate refund when the landlord refused to repay a proportion of the advance rent paid.

 

The sums involved were substantial.

 

M&S argued that despite the fact that the lease contained no express right to a refund, that such a term should nevertheless be implied into the lease by the court and that the landlord should not be entitled to hold onto what was, in effect, a windfall. That argument convinced the judge in the High Court.

 

However, the Court of Appeal has now overturned that decision stating that had the parties intended for there to be an obligation on the landlord to make such a refund then the lease would have clearly and expressly stated that. The Court of Appeal was not minded to imply any such term into the lease.

 

So, for now the widely accepted view mentioned above is good law.

 

The moral of the story is that, as ever, the terms of a contract (a lease in this case) should be as clear as possible. In particular on this issue, a break clause in a lease should contain an express obligation on the landlord to refund to a tenant all monies paid in advance which relate to the period after the end of the lease following the valid exercise of a break right.