Break clauses are currently one of the hot topics in real estate litigation. This is unsurprising given the state of the market. A High Court case reported this week shows how difficult it can be for tenants to operate a conditional break clause in a lease. In this case, the lease contained a condition that for the break to operate there must be no overdue payments by the break date. Around £130 of default rate interest was overdue at the break date. The tenant paid rent due the day before the break by way of cheque, but did not pay any interest. The default interest had not been demanded by the landlord but the tenant was found to have failed to satisfy the pre-conditions to the break and the lease now continues for five years.
For tenants this looks like a tough decision.
- 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.