Commercial Property News

Break Clauses and Rent Apportionment

In a recent line of cases, most notably PCE Investors Ltd v Cancer Research UK [2012] and Canonical UK Ltd v TST Millbank LLC [2012], it has been held that in order to comply with the conditions of a break clause, the whole quarterly rent will be due where the break date falls between rent payment dates.

There will be no subsequent apportionment permitted unless there are specific provisions for this contained within the lease. This approach may be cause for concern for some tenants, as they could be required to pay for services which they have not been provided with.

Despite the seemingly strict approach, the same view has been adopted in the recent Court of Appeal decision of Marks and Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Limited. Again in this case, the tenant was required to pay the full quarterly rent when the break clause was exercised.

The tenant, Marks and Spencer, had a right to break the lease on the 24th January 2012 provided that there were no rent arrears at that date and a penalty payment was made. Such payment was made alongside the rent up to the 24th March 2012 (the end of the quarter), and the right to break the lease was exercised. The tenant then sought a refund of the overpayment of around £1.1 million in rent, insurance, service charges and car parking charges. Contrary to the judgment of the High Court, the Court of Appeal came to the conclusion that no term should be implied into the lease to permit such refund. The reasoning behind this was that the possibility of an overpayment should have been clear to the parties from the outset, and additional express wording should have been included in the lease to provide for this.

Whilst the outcome of this case seems particularly hard on tenants, it provides clarity on the approach which should be adopted to ensure break conditions are complied with and the circumstances under which overpayments can be recovered. The Court of Appeal seem to have assumed that it should be apparent that overpayments could be made where a break date falls between rent payment dates, however in reality, this does not appear to be the case as relatively few existing leases contain express repayment clauses.

This serves as a warning to tenants to take great care when considering the wording of break clauses when entering into a new lease, as the Courts are likely to take a literal approach when interpreting the wording. Tenants will therefore be well advised to take specialist advice when negotiating heads of terms, and to ensure specific wording is included to cover such circumstances.

To read the case in full, please click here.

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