The High Court has recently considered if a tenant had complied with the terms of a break clause in a lease where it had not paid default interest on previous late payments of rent.

Even although the landlord had not issued any demand for default interest, the High Court held that a tenant owed default interest on late payments under the lease. As the tenant had not made all payments due under the lease as required by the break clause, the tenant's right to break the lease had not been validly exercised. The result was that the tenant remained bound for the remainder of the lease term, despite the amount of default interest being negligible. The judge admitted that the result in this case was a "harsh one" and that the conditions of the break clause represented "something of a trap for a tenant".

Wording relating to the payment of default interest is commonly seen in leases and this decision will therefore have implications for many landlords and tenants, both when negotiating new leases and exercising break clauses in existing leases.

It should be remembered that a break clause will be strictly construed and any conditions attached to the right must be strictly performed. If there is a condition that the tenant must have paid the rent and performed and observed its covenants and conditions and in fact the tenant has not, then the tenant will be prevented from exercising the break clause. This applies however trivial the breach.

The case contained a discussion on various modes of payment. The court decided that although the tenant may not know exactly when payment was actually made, because of the different modes of payment, there was unlikely to be any real practical difficulty in knowing the sum due to the landlord without a demand from the landlord.

Summary

Landlords, provided that they have not misled the tenant in any way, may be able to rely on a failure to pay default interest on previous arrears to defeat the exercise of a tenant's break clause. This would be particularly appealing to a landlord in an adverse property market.

What to do

Many break clauses do require tenants to be up to date with all payments, not just the main rent. When exercising a right to break in an existing lease, the tenant should check carefully if default interest may be due on past arrears. The tenant may have difficulty in knowing precisely how much default interest is due without having received a demand from the landlord as there may be delay in transfer between the tenant’s bank and the landlord’s bank. The tenant will therefore need to estimate the payment due and err on the safe side. This is however a small price compared with remaining bound under the lease.

Avocet Industrial Estates LLP v Merol and another (2011)

More information

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