Rent Payments Required to Preserve Break Options in Leases (A Case Law Update)

There has been a recent decision in the High Court of Justice in England which may affect tenants of commercial properties in Scotland.

The High Court of Justice recently decided a tenant was still committed and locked into their Lease as a result of failure to pay all of the rent due under the Lease, notwithstanding an attempt to exercise a break option, even if that means paying for a period beyond the break.

The relevant case is PCE Investors Limited –v- Cancer Research UK. The tenants were PCE Investors Limited. They had assigned a tenancy from a third party and Cancer Research UK were the Landlord. The term of occupation in terms of the Lease was from 12th October 2005 to 27th September 2014 and annual rent was paid quarterly.

The relevant clause in the Lease provided for a conditional break option. There was a condition in the break clause which provided that in order to exercise the break option the tenant “must have paid the rents reserved and demanded up to the termination date”.

Subsequently the tenant exercised their break option to terminate the Lease. They made payment to reflect the outstanding rent up to the termination date. They did not make payment for the full quarter period as otherwise would be due. They asked the Landlord’s agents to confirm receipt of this payment paying rent up to the break date.

The High Court of Justice prepared a lengthy summary and the most relevant points from this were:-

  • It was not sufficient to simply pay rent to the break option termination date. The tenant was required to pay a full quarter’s rent to the last quarter day despite the Lease being terminated before the end of that quarter period; and
  • The Landlord was not obliged to confirm the rent due by the tenant and was not barred from defending the action by not confirming this.
Application in Scotland

The Scottish Courts may choose to diverge with the second conclusion of English Courts if some element of bad faith in the Landlord’s part could be found. However, the first conclusion is the crux of the case.

Whilst there is little authority in Scotland confirming similar reasoning would be applied to the first conclusion there is a suggestion that in terms of general commercial contract construction a similar approach would be adopted by a Scottish Court.

In Scotland a contract is construed by considering “the whole expressed terms of the contract” and what “accords with business sense” recent commentary amongst academics indicates that this reasoning is likely to be followed in Scotland.

Furthermore, the Scottish Courts have recently demonstrated a very strict approach when determining if the precise requirements of break clauses have been followed and there is no evidence that they would deviate from the strictest of terms in respect of this.

It is crucial therefore that both landlords and tenants always scrutinise the lease when dealing with the exercise of a break clause. If you are a tenant and the break is conditional upon performance of express obligations the only safe course of action to avoid an argument with the Landlord (and potential court action) is to ensure full compliance with the terms of the Lease. Even if the Lease is not crystal clear the tenant should ask themselves would they rather be faced with a Landlord claiming the Lease continues or alternatively make full payment and request a repayment from the Landlord after they have departed from the premises?

 

This Briefing has been produced for information purposes only and is based on the law and other information available at the time of writing.  We cannot be held responsible for any losses incurred through acting or failing to act on the basis of anything contained in this Briefing. 

If you require advice on any of the matters referred to, please contact us so that we can advise you, taking account of your own particular circumstances and requirements.

July 15, 2014