Real Estate Legal Update : Global Corporate Real Estate Property and Planning Lawyer & Attorney : Reed Smith Law Firm

Tenants note

• Unless the lease specifies otherwise the default rate interest does not have to be demanded and you are just as capable as the landlord of calculating what is due.
• You can only make payments by cheque for money due under the lease if there is an agreement between you and the landlord that cheques are acceptable. The agreement can be implied. If cheques have been accepted previously without objection that will suffice.
•  When agreeing future leases make it clear that break rights are unconditional because the landlord is not disadvantaged as it can still claim damages for any breaches of the lease that existed at the break date after the lease has come to an end. This should be dealt with at the heads of terms stage.
•  Tenants with conditional break rights will need legal advice at the earliest stage possible where they are thinking about exercising a conditional break. Please see our previous posting about disputes under break notices.
• For any tenants interested in the technical arguments please see our longer posting explaining the landlord’s position.

Payments by cheque

• There was an implied agreement that payment could be made by cheque because some payments had been made by cheque (although recent payments were made by BACS). Implied agreements like these will depend on the actions of the parties.
• There was no requirement for the landlord to be paid in cleared funds so the cheque did not have to have cleared by the break date as long as the cheque cleared in due course.
• The landlord accepted the cheque by not rejecting it in the two days it had to do so (being the break date and the day before it). In the Avocet case the cheque was not returned by the landlord until three weeks had passed.

Default interest – do landlords have to notify their tenants and demand it for it to fall due?

• The lease did not expressly require a formal demand (which is very common) and it was held that default interest was due on a daily basis even if the landlord had not made a demand for the default interest. The tenant, who frequently paid rent late, was just as capable of calculating the amount of default interest due.

Estoppel – this is always a worry to transactional real estate lawyers as it blurs the black letter of the contract especially when you consider that it is possible for silence to create an estoppel!

• The landlord received the tenant’s cheque with a letter stating that no sums were outstanding the day before the break date. This was in error (default interest being due) but the landlord did not know of the tenant’s mistake until after it had taken legal advice (after the break date) so there was no estoppel for the tenant to rely on.

In conclusion

• Landlords who have made their break clauses conditional on the payment of all outstanding sums may be able to rely on default rate interest due from past arrears to defeat the operation of a break clause.
• Landlords receiving cheques in similar situations need to react very quickly and return them if they do not want to be found to have accepted payment.
• As ever, everything will turn on the facts of each case.

There are still a number of leases in existence which contain a contractual right for a tenant to break its lease as long as a number of different pre-conditions are met. These break clauses are extremely difficult for tenants to manage effectively. The leases in question often date back to a time when the landlords had all the bargaining power and tenants were too willing and signed up to onerous terms. The most recent litigation on a conditional break clause, NYK Logistics -v- Ibrend Estates actually contained a much fairer break clause but one which the tenant still failed to effect.

In today’s case, NYK Logistics were the tenant, they served their break notice and then spent time repairing and reinstating the premises to avoid a claim for dilapidations from the Landlord after the break date.

The tenant’s difficulty was that it had not finished its works and it stayed in possession and control of the premises after the break date. In the last week of the term there had been inconclusive negotiations for an extension of time to finish the dilapidations works. On the break date the tenant did not return the keys to the landlord, kept site security in place and the Court of Appeal found that it took no actions that were consistent with delivering up the premises with vacant possession.

The tenant believed it could rely on the fact that the landlord had waived the breach of the obligation to deliver up vacant possession but the landlord had not done so and had not intended to do so. Waiver is a difficult point to prove.

For those who like the technicalities, whether properties are delivered up with vacant possession is still a two part test –

• Was the person who was required to give vacant possession still actually using the property for his own purposes?
• Is the physical condition of the property in such a state that there is no substantial impediment to use of the property (or a substantial part of it) by the person taking the property? Physical impediments only become vacant possession issues in exceptional circumstances. This was not the situation in the Ibrend case.

The lessons to be learnt -

• Tenants cannot expect landlords to help them satisfy the pre-conditions of any break clause; they must be prepared to stand alone and set up all the evidence possible to show that they have complied with the lease and delivered up vacant possession.
• Even if a lease does not say it (although most do), vacant possession is required when a lease term comes to an end on the exercise of break rights.
• Waiver is a difficult concept both to understand and to prove.  We find it is often misunderstood, as was the case here.

Landlords will be relieved that this decision has gone in their favour.
 

In this blog, we set out a short checklist of key points to consider when exercising a break.  There will often be other things to check which, if incorrect, could affect the validity of the break, but the following are where most of the problems arise:

1. Dates in the diary - check and carefully note deadlines for service of notices, as well as the break date itself. 
   Tip: Note these in a colleague’s diary as well in case of unexpected absences
   
2. Pre-condition pitfalls - review the lease to establish whether there are any pre-conditions to the break and check in particular:
   
   
   • When they have to be complied with - the date of notice, the date of break, or both?
      
   • Repair - is the break conditional on your handing back the property in full repair? It can be bad news if so - it can’t be guaranteed that the break will be effective as there will often be some minor breach the landlord can use to its advantage. All is not lost, however, as you may be able to negotiate with the landlord as to the state the property is needed to be in before the break is considered effective.
      
   • Reinstatement - do you have an obligation to remove any alterations made? If so, ensure you make the necessary arrangements for removal in good time.
      
   • Vacant possession - even if not expressly set out in the lease, there is an implied obligation to hand the property back with vacant possession. If you have sub-tenants and/or have made alterations to the premises, the position can be complicated and we advise you to seek further guidance as to what is required of you. Our Real Estate Litigation team can assist.
      
3. Identity issues - the identity of the landlord must be carefully checked.  Even though it sounds obvious, cases of mistaken service do continue to turn up in the Courts.  Whilst much of this process is down to the solicitors carrying out searches at the Land Registry, you should check who it is you pay rent to.
    
4. Neglected notices - once again, it sounds obvious, but the lease clause specifying how notices are to be served must be carefully checked and complied with. This is usually the job of the solicitors.

As you can see, there is a lot of scope for things to go awry in the service of a break notice. Landlords are often driven to challenge such notices - the prize being another five or ten years of the tenant being on the hook. This happens often where the property will be difficult to remarket. Our experience is that landlords will usually look for anything, however small it may seem, which renders the break inoperative.

Given the importance to the tenant of getting it right, we naturally recommend always seeking the advice of your usual Reed Smith lawyer or contacting the authors.  

When formal notices have to be served, there is often a significant event that will happen as a result. It can be vital that the formalities of the clause specifying how notices are to be served are observed because as one case famously said if the clause had said that the notice had to be on blue paper it would have been no good on pink paper!

Three different statutes affect the service of notices in the property world and all of them will be overridden by any specific provisions written into the document under which the notice is to be served. The technicalities of this would not make interesting blog reading although they exercise real estate lawyers' minds when notices have to be served.

Taking the example of the break notice the well advised tenant will be asking:

• What does the lease say about how a notice is to be served? Is the specified method for service mandatory or is it just a permission to serve as specified? Old leases often specified that documents could or should be served by registered post which no longer exists. What is the appropriate method today?
•  Am I likely to have a dispute about whether notice has been validly served and if so how can I go about proving I served properly?
•  What is the up-to-date address for the landlord? If you now have an overseas landlord how can notice be served on it validly and how long will it take?
• Does the notice have to be received to be effective?
•  Will the notice be deemed to have been received even if it does not come to the attention of a specific individual by the deadline and if so how soon is it deemed to be received?
•  What deadline am I working to?

For Landlords the alarming message is that non receipt by the deadline is not necessarily the end of the story. Notices may still have been served validly even if never received, depending on how the notice is or has to be served. There is no easy solution to this for Landlords.

The current postal strikes add further complications. The News is all about the backlog of mail and fears that some of it may never be delivered. We have recent experience of a break notice sent by recorded delivery taking over a week to arrive.

Here are a few practical tips which might help when serving break or other kinds of notice:

•  Check carefully what the document says about service and if the required method is mandatory, stick to it by the letter and serve it in plenty of time - so much time that you could do it again before the deadline if something goes wrong!
• If you suspect that strict compliance with the service requirements will result in the notice not reaching the recipient by the deadline (whether because of the post strike or for other reasons) then consider ways of minimising the risk of future disputes. One approach will be to make contact by more practical means to make sure the right person knows what is happening within the deadline  e.g. serve by post if that is the required method but also deliver a copy/duplicate by hand.
• Make sure you can prove service of your notice.
•  Ask for an acknowledgement of receipt and chase for it if not given promptly.

Extra service might entail a bit of expense, time and effort but the costs are likely to be far cheaper than paying rent and other outgoings for unwanted space until the end of the term or until the next break date!

We know, of course, that this is a time where legal spend is being watched by many but not instructing your solicitor to serve notice could be a false economy.