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Conditional break rights: rent traps for tenants- 23/12/2011
BREAKING DOWN
Conditional break rights: rent traps for tenants
Conditional break rights consistently cause headaches for tenants, and the recent case of QuirkCo Investments Ltd v Aspray Transport Ltd (2011) is no exception. The landlord, QuirkCo, tried to defeat its tenant’s break right on the grounds of non-payment of insurance rent and material breaches of the tenant’s repairing covenant.
QuirkCo accepted that there were triable issues on the alleged disrepairs but sought a declaration that the break right had been lost in any event, because the tenant, Aspray, had failed to pay the insurance rent on time. On 23rd November 2010, QuirkCo had sent Aspray an invoice for £3,609.72 representing its share of the insurance premium for the period from 1st December 2010 to 30th November 2011. Believing that it should only have been invoiced up to the break date, 18th December 2010, Aspray didn’t pay. The landlord’s cheque to its insurance broker had gone missing, and a replacement cheque wasn't banked until January 2011. Aspray claimed that QuirkCo had not been entitled to demand the insurance rent when it did, because it had not paid the premium, with the result that there were no arrears of insurance rent on the break date.
What the court said
The court found that the wording in the lease supported the tenant’s argument. The landlord could only demand the insurance rent once it had itself incurred the cost. QuirkCo had asked the court to interpret the insurance provisions in accordance with commercial reality – the insurance policy had after all been renewed on 30th November – but the court declined, adhering closely to the actual wording of the lease. A leasecould permit a landlord to demand payment before expenditure, said the court, but this lease did not entitle this landlord to do so. The landlord’s demand was therefore invalid, and the tenant was not in breach of this break condition.
Overpayment of rents
By way of counterclaim, Aspray tried to recoverpart ofthe basic rent it had paid in advance on 29th September 2010, for the six days between the break date and 24th December 2010, the end of the September quarter. The court ruled against the tenant on this point. QuirkCo was entitled to retain the full amount of the rent, notwithstanding that the lease had subsequently determined, because Aspray’s contractual obligation to pay the whole of that quarter’s rent had arisen before the break date.
Is this fair?
The amount of rent overpaid in this case was £2,160.31. In some instances, for example, where the break date falls on the first day of a new rent quarter, much larger sums will be involved, and tenants will struggle to understand why they have to pay rent for a period of non-occupation. For the same reason, Aspray wasn’t prepared to contribute towards the insurance premium for the whole of the insurance year, only for the 18 days of occupation up to the break date, a sum of just £151.50.
The hard fact is that, in the absence of an express right for a tenant to make an apportionment, the landlord will generally be entitled to demand the whole of the rent or insurance premium (or service charge, for that matter), for the simple reason that rent cannot be apportioned at common law, and the Apportionment Act 1870 only entitles a tenant to apportion rent that is payable in arrears, which is hardly ever the position under commercial leases.
A tenant is only entitled to a refund of overpayments if the lease supports such a claim. Where there is no express provision for repayment, as is often the case, the courts are willing to look at other terms in the lease to see if they lend support to a tenant's claim for a refund.
Code for Leasing Business Premises in England and Wales 2007
The Code recommends that the only pre-conditions to tenants’ break rights should be that they are up-to-date with the main rent, give up occupation and leave behind no continuing subleases. This is sound advice for tenants, based on lessons learned from an abundance of case law. However, the Code does not address the problem of overpayments.
IMPLICATIONS OF DECISION
Negotiating new leases
- When negotiating a new lease, tenants should always try to secure an unconditional break right as a starting point, particularly if they are paying a higher rent in order to secure the break right. In practice, and as a minimum, a tenant will usually have to accept a condition that it is up-to-date with the basic rent.
- Overpayments should be dealt with either by–
- insisting on an express right for the tenant to apportion the final payment of rent, and any other sums due, up to the break date, or
- allowing the tenant to recover any overpayment.
- It is also a good idea to ensure that the break date falls at the end of a completed rent quarter, not at the start of a new one. However, this should not be seen as an alternative to an apportionment or repayment provision, as tenants will still want to recover overpayments of service charge and insurance rents, which generally do not coincide with quarter dates.
Exercising a break right
- Tenants should always seek professional advice well in advance of exercising a break right. Do not be tempted to treat it as a straightforward administrative exercise. Instead, regard it as a series of obstacles set by the landlord who, when faced with a significant loss of rent and all the other costs associated with an empty property in a downturn, may challenge the break for the flimsiest of reasons.
- Always pay the whole of the basic rent and all other sums that are conceivably due under the lease before the break date, even if they are disputed. In the period leading up to the break date, any demands for insurance rent, service charges and any other payments should be paid by direct bank transfer, not by cheque (even if payment is usually made by cheque), in case the cheque goes astray.
- Where there is no provision for contractual recovery of an overpayment, then the additional payment should be made on a "without prejudice" basis, with a view to seeking to recover the overpayment later, once the lease has been safely terminated. Itmay be possible to negotiate something with the landlord, but the landlord is under no obligation to agree to any refund. Equally, the tenant may struggle to recover the additional payment under the law of restitution (also known as “unjust enrichment”), as a distinction has been drawn between money paid under protest and money paid because of a mistake.
Conclusion
There is no straightforward solution to this particular problem. Ultimately, tenants must weigh up the amount they may lose by way of overpayments, against the costs of continuing liability under the lease.
Written by Deborah Caldwell