The recent case of PCE Investors Limited v Cancer Research UK gives useful clarification on what a tenant must pay when its break right is conditional upon rents being paid up to the break date
The lease started on 12 October 2005 and ended on 27 September 2014. If the tenant successfully exercised its break right, it would end on 11 October 2010.
The tenant served the appropriate notice in writing to break the lease, but the right to break was subject to a condition that the tenant must have paid the rents up to the break date.
When the rent became due for the rental period in which the break date fell, the tenant paid what it thought was the correct amount of rent. This was an apportioned amount calculated for the period 29 September 2010 to 12 October 2010. It asked the landlord for confirmation that its calculation of the rent up to the break date was correct
The landlord had previously served a rental demand for the full quarter's rent and did not respond to the tenant's correspondence until after 12 October 2010. Then, it advised the tenant that its failure to pay the full quarter's rent meant that the break had not been validly exercised and that the lease continued.
The tenant disagreed, but the court decided in favour of the landlord.
- The tenant was not entitled to pay only an apportioned part of the rent due on 29 September 2010. Unless a lease makes express provision as to what sums a tenant has to pay between a quarter day and a break date, the rent for the full quarter has to be paid even though that payment would include sums for a period falling after the break date. Where a full quarter's rent had been paid (and unless the lease provided otherwise), a tenant will not entitled to a refund of any rents referable to the period falling after the break date.
- The landlord was not prevented, or estopped, by its actions from denying that the break had been effectively exercised. It was not required to point out to the tenant what rents needed to be paid by it or that the tenant had failed to pay the required amount. In the absence of confirmation from the landlord that an underpayment of rent was acceptable, the tenant should have paid the quarter's rent in full.
What does this mean?
This case is another stark reminder that a tenant must comply absolutely with any conditions attached to the exercise of a break option.
Where a break date falls on a quarter day, and the break clause requires that rents are paid up to date in order for the break to be validly exercised, the full quarter's rent must be paid, even though the tenant will only be in occupation on the first day of the quarter.
What should you do?
A tenant, intending to exercise a break option, must ensure that it understands what it has to do in order to comply with any pre-conditions attached to that option.
- Where a break is conditional upon payment of the rents in full and if there is no express provision regarding apportionment, a tenant must ensure that the rents are paid in full.
- When negotiating terms for a lease, insist that any break right is freely exercisable. If it will be conditional on payment of rents, provide that either an apportioned amount of rent might be paid for the rental period up to the break date or that an apportioned sum should be repaid by the landlord after the break option has been validly exercised.