Commercial Property Solicitors

Welcome to Myerson Property Litigation’s Autumn/Winter 2013 update. In this update we explore the perils of exercising a break clause and also bring you up to date with the changes being made to the common law right of distress.

We do hope that you find this update useful and informative.

Myerson Property Litigation are a specialist, dedicated team with in-depth knowledge and skills to provide expert advice on all areas of property disputes. Whether you are a landlord or a tenant of commercial or residential property, Myerson Property Litigation offer high standards of professionalism and a wealth of experience and can advise you in relation to any dispute that arises.

The Perils of Exercising a Break Clause

A break clause is a provision in a lease which allows the landlord or the tenant to terminate the lease early. It may allow the landlord or tenant to do this on specified dates during the term of the lease or on a rolling basis.

Conditions are often imposed on the party wishing to exercise the break clause. Common examples are that the rent is paid in full up to the date of termination and that there are no material breaches of covenant.

If the conditions have not been met by the date specified in the break clause, the break will be ineffective and the lease will continue.

This can have a significant impact on the party failing to exercise the break clause effectively. It is an established principle in law that any conditions must be strictly performed.

Given that the break date will often fall between rent payment dates then if the rent is paid quarterly in advance, tenants often ask whether they need to pay the full quarter’s rent or just the rent up until the break date if there is a condition that rent needs to be paid in full.

There have been a number of recent cases that deal directly with this point. In the cases of PCE Investors Ltd v Cancer Research UK [2012] and Canonical UK Ltd v TST Millbank LLC [2012] it was held, on the facts of each case, that if the break clause requires payment of the rent in full for the break to be effective and the break date falls between the rent payment dates then the tenant is required to pay the full quarter’s rent and the tenant will not be able to claim back from the landlord any overpayment.

If the tenant only pays rent up until the break date then the break will be ineffective.

The recent case of Marks and Spencer PLC v (1) BNP Paribas Securities services Trust Company (Jersey) Limited and (2) BNP Paribas Securities Services Trust Company Limited [2013] has altered the position.

n this case, Marks and Spencer were the tenant of an office block and it paid rent in advance on the usual quarter days. The lease contained a break clause allowing Marks and Spencer to terminate the lease on 24 January 2012 provided there were no arrears of rent at the break date and Marks and Spencer paid to the landlord a premium of 1 year’s rent.

Marks and Spencer paid the full quarter’s rent (25 December – 24 March) and the premium and successfully terminated the lease. Once the lease had been terminated, Marks and Spencer requested a refund of the rent they paid to the landlord for the period after the break date. The landlord refused to refund the sums paid and the matter proceeded through the Courts.

The Court held that there was no express provision in the lease allowing the repayment to be made. However, the Court implied a term into the lease allowing the rent paid following the break date to be returned to Marks and Spencer.

The Court placed on lot of emphasis on the payment of the premium by Marks and Spencer to the landlord. It found that the parties had considered what compensation the landlord should receive if the break clause was exercised and considered it was unlikely that the parties intended that the landlord be compensated twice by being paid the full quarters rent and the premium.

Whilst this may be welcome news for tenants it is important to remember that each case will be decided on its own facts.

The Court will always consider the wording of the lease when coming to a decision and it is important that landlord and tenants carefully draft and negotiate break clauses at the outset.

Whilst it is advisable for a tenant to be cautious and pay the whole quarter’s rent and not just the rent up to the termination date, there is now some scope for the tenant to recover the surplus amount after the event.

Distress to be Abolished From 6 April 2014

There are a number of options available to a landlord of commercial premises if their tenant fails to pay the rent.

One of the options is to exercise the common law right of distress. This is often a fast and cost effective method of recovering rent arrears because bailiffs can usually be instructed to attend the premises and seize goods to the value of the arrears within 24 hours.

Distress can only be exercised in relation to arrears of rent. Most modern leases will state that service charge, insurance, VAT and interest are reserved as rent and, if this is the case, the landlord can exercise distress to recover the arrears of these payments. If the lease is silent on whether these payments are reserved as rent then the landlord will only be able to exercise distress for basic rent arrears.

On 6 April 2014 the commercial rent arrears recovery scheme (“CRAR”) will come into force and the remedy of distress will be abolished. The main changes are as follows:-

  • CRAR can only be used if the outstanding sums (less interest and VAT and any set-off the tenant is entitled to make) exceeds the minimum amount of 7 days’ rent.
  • The landlord must now give their tenant 7 clear days’ written notice (excluding Sundays, Christmas Day, Good Friday and Bank Holidays) together with information such as the name and address of the landlord and the nature of the debt, before allowing an enforcement officer to seize goods.
  • The enforcement officer can only take control of goods belonging to the debtor. Goods necessary for the debtor’s personal use or in connection with employment or their business are exempt up to an aggregate value of £1,350.
  • The landlord will not be able to use the CRAR process to recover service charges, insurance rent or other sums reserved as rent under the lease. CRAR can only be used to recover the principle rent together with VAT and interest; and
  • CRAR only applies to commercial premises where there is a written lease and does not apply to mixed use premises.

Whilst the changes in the legislation are likely to be welcomed by tenants, landlords are likely to find that CRAR will not provide them with such a quick and cost effective method of recovering commercial rent arrears. In addition, given that tenants will be provided with a written notice prior to the enforcement officer seizing the goods, tenants may well remove valuable goods to evade enforcement.

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