Break Right
Introduction
A common feature of many leases in today’s commercial market is a break right permitting the Landlord, the Tenant or both parties to terminate the lease on a date before the contractual end date (the “Break Date”). Any Tenant break right is usually subject to certain conditions prescribed by the lease being met. If the break right is exercised correctly, the lease will terminate on the Break Date, if it is not, the lease will continue and the Tenant will be liable for the rent and other sums due thereunder until the end of the Term.
Break Conditions
The Courts have been clear in determining that any conditions attached to the break right must be strictly complied with in order to validly exercise the break. Such conditions usually include (but are not limited to) the Tenant yielding up the property with vacant possession, in accordance with the terms of the lease (e.g. repair) and having paid all rents due.
This note looks more closely at how the rent due under a lease is affected if a break right is exercised, namely:
1. if the Break Date falls within a rental period i.e. not on a rent payment date, and the lease specifies that it is a condition of the break that all rents have been paid, does the Tenant have to pay the entire period’s rent or can it apportion the rent from that payment date to the Break Date? and
2. if a Tenant exercises a break right whereby the Break Date falls within a rental period and it has paid the entire period’s rent, is the Tenant entitled to a repayment of the rent paid in respect of the period from the Break Date?
Is the Rent to be Apportioned?
If a condition of the break is the payment of rent, does that relate to rent from the payment date to the Break Date or for the full rental period in which the Break Date falls? The case of PCE Investors Ltd v Cancer Research UK [2012] EWHC held that where a break right contains a condition requiring the Tenant to have paid “the rent reserved and demanded by this lease up to the termination date” this does not imply that the rent could be apportioned to the Break Date.
Therefore Tenants are required to pay the full period’s rent on the payment day prior to the Break Date. This would seem logical given that compliance with other conditions (if any) such as yielding up with vacant possession and in good repair etc. cannot be ascertained until the Break Date and therefore the validity of the break may not be certain at the payment date prior to the Break Date. If it is the parties’ intention that the rent should be apportioned, the lease must explicitly state this and there must be no ambiguity in this respect.
Repayment of Rent in respect of the Period after the Break
If the rent is paid for the entire rental period and the break is validly exercised, is the Tenant entitled to a refund of the monies which relate to the period after the Break Date? The recent Court of Appeal decision in Marks & Spencer PLC v. BNP Haribas Security Services Trust Company (Jersey) Limited and Anor [2014] EWCA and CIV 603 (“Marks v. BNP”) held that it is not appropriate to imply a term into the lease providing that any advance payment of rent should be reimbursed. Further, an apportionment clause contained in the lease referring to the rent being apportioned at the end of the term does not apply when a break right is exercised and determines the lease early and not at the end of the term.
The Supreme Court has recently granted permission for Marks & Spencer to appeal the Court of Appeal decision, so watch this space. Pending the outcome of that appeal however, you should consider that any advance payment of rent in relation to the period beyond the Break Date is not refundable to the Tenant. If the parties agree that such rent should be refundable, the Tenant must ensure that this is expressly stated in the lease in order to ensure that such monies are repaid.
Does this apply to pure rent or all sums due under the Lease?
In Marks v. BNP, it is accepted that service charge is payable in respect of the services used and therefore any service charge paid in respect of the period after the Break Date should be refunded. The case of Browns Operating Systems Services v. Southwark Roman Catholic Diocesan Corporation [2007] EW CA SIV 164 further held that a Tenant is only liable for the amounts actually spent by the Landlord in providing the services before the expiry of their lease. Accordingly, any advance payment of service charge in respect of the period after the Break Date should be refunded.
However, Marks v. BNP held that there is no basis for implying that insurance rent and car parking fees should be repaid. Much like the case with rent, if advance payments are to be refundable, the Tenant must ensure that this is expressly stated in the lease.
Conclusion
Based on current case law, if a break right contained within a lease requires the Tenant to pay the rents due up to the Break Date and the Break Date falls within a rental period (i.e. not on a rent payment date), unless the lease expressly states that this is to be apportioned the rent for that entire rental period must be paid. Further, unless expressly set out in the lease, the Tenant will not be entitled to a refund of the proportion of such advance rent, car parking fee or insurance rent in respect of the period from the Break Date. Any advance payment of service charge for this period is however refundable.
Therefore in order to ensure that you, as Tenant, are not liable to pay for rent in relation to a period when you have no interest in a property, it is important that your lease expressly provides that any rent paid in relation to the period following the Break Date is to be repaid.
