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.

The case is MW Trustees Limited and others v Telular Corporation and Telular were the tenant and had a right to break their lease on 1 March 2010 as long as they had given the landlord six months' notice in writing (and paid rent and other sums due up to the break date).

In October 2008, the original landlord transferred its interest in the property to MW Trustees who held the property on trust for two pension funds. The tenant was informed of the change and there was no dispute at the trial on this point.

In error, the tenant served the break notice on the previous landlord. However, it clearly reached the current landlord whose managing agent emailed the tenant saying they accepted the break notice served on the former landlord and confirming that they were happy for the tenant to break the Lease. They went on to ask for a new break notice to be served on the current landlord. No new notice was served.

The landlord's case was that the managing agent’s email required a further notice to be sent in order to trigger the break and that, since that was never served, the break was never exercised. The tenant, however, argued that the requirement for a further notice was only a formality and that the break had already been accepted by the wording used in the managing agent’s email.

The Judge found that the managing agent’s email had the effect of accepting that the original notice had terminated the Lease and that the landlord had no further right to argue that defective service prevented the break operating or, alternatively, was prevented from denying the validity of the notice.

The Judge also commented that there is no duty upon a landlord to tell a tenant that he believes a notice has not been validly served and so the landlord would have been best advised to have simply acknowledged receipt of the notice and said nothing further. That would have preserved its right to contest the validity of the notice at a later date had it so wished. In this case, the landlord was left with a void so it decided to re-visit the issue of the break notice but unfortunately, its managing agent’s enthusiasm in the email put paid to that.
 

Broadly speaking, the issues that arise when a break notice is served are:

1. Was the notice validly served on the correct person, at the correct address, and by the correct method?

2. Was the break validly exercised in terms of any conditions that the tenant had to comply with in order to break it?

• As to #1, the examples we see include notices addressed to managing agents, previous landlords, or simply addressed to the wrong address. The lease may be specific and direct service at the landlord's registered office address, for instance. It is imperative that the notice provisions of the lease are closely looked at before any notice is served. Many leases will also contain reference to section 196 of the Law of Property Act, which lays down specific methods of posting notices: ordinary first class will not do and, at the other end of the spectrum, service by courier will also be challenged.
• The break clause itself must also be scrutinised. Not only will it provide for the period of notice that has to be given (and you'd be surprised how often that is ignored), but it will also set out any conditions to the exercise of the break right. This could be simply to have paid the rent up to the date of the break, or it could be to have complied with all covenants under the lease. Some clauses even require compliance as of the date the break notice is served. Some add confusion by specifying “material compliance,” which is another area where disputes can easily arise.

Courts currently seem inclined to treat a notice as validly served if in fact it came to the attention of the correct person at the time it was served or shortly thereafter, especially if an agent held itself out as having authority to accept service of notices on the landlord's behalf. A presumption toward the reality of the situation seems to be favoured. It is unlikely, however, to get you past specific provisions in the lease as to service at a particular address. 

There is no such pragmatism, however, in terms of the effectiveness of the notice to terminate the term where conditions have to be complied with. Here, you may expect strict compliance with the terms of the lease, and this is where landlords can and do challenge. Was vacant possession actually given when not all of the tenant’s goods were removed by the break date? Was all rent, service charge, insurance, etc., paid up to the break date if it was apportioned up to the break date and not the next quarter day? Perhaps the biggest killer is, was the repairing covenant complied with or materially complied with, and this is often specified as a pre-condition to any break? 

For the tenant's part, no tenant should be exercising a right to break where the repairing covenant is to be complied with, without entering into an agreement with the landlord as to exactly what is required in terms of repair at least six months before the termination date if possible, to allow work to be done. For the landlord's part, you have no obligation whatsoever to tell the tenant what it needs to do to comply with the covenant if you don't want to.

The subject is a minefield, and this is the barest of overviews. We can help if you need specific advice.