A High Court case reported this week shows how difficult it can be for tenants to operate a conditional break clause in a lease. On the face of it, this looks like a good decision for landlords. In this case, around £130 of default rate interest was overdue at the break date. The lease was clearly stipulated that the break notice would be ineffective if any payments due under the lease had not been paid by the break date. It is always of interest to landlords to see a robust interpretation of a break clause but the landlord’s ‘win’ in this case did depend upon the facts so this makes the outcome of similar cases difficult to predict.
The case is Avocet Industrial Estates LLP v Merol Ltd and Tudor Rose International Ltd and it raises a number of points which will be of interest to investors and those managing investment property.
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.
- 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.