Tenant not allowed to pay pro-rata rent so break notice ineffective
Tenants trying to exercise a break clause in their leases before the end of a quarterly rent period should beware trying to pay only a pro rata part of that rent when it is demanded, or risk the break being ruled ineffective by the court.
A tenant’s lease required rent to be paid “yearly and proportionately for any part of a year” in equal quarterly payments. The tenant served notice to end the tenancy under a break clause in the lease – a clause allowing it to get out of the lease at certain points specified in the lease, provided it met certain conditions. As drafted, the break clause was only effective if the tenant had paid:
- rents under the lease up to and including the break date; and
- a sum equivalent to one month’s rent.
The effect of a valid break would be that the lease would end on 22 August, before the next full quarter had finished.
The landlord issued an invoice for a full quarter’s rent for the period from 24 June. The tenant paid the sum in the invoice in full, and referenced the invoice number. On the face of it, it seemed the tenant had not paid the sum equivalent to the additional one month’s rent, and the landlord argued the break had not been validly exercised.
The tenant claimed that according to the wording in the break clause it only had to pay rent up to 22 August. It therefore argued it had complied with the break conditions, because the payment it had made was for both rent up to 22 August, and also the extra sum it had to pay (equivalent to one month’s rent).
The High Court disagreed, ruling that the tenant was contractually obliged to pay the full quarter’s rent in advance on the quarterly rent day despite the break notice, as there was no certainty at that point that the break would be successfully exercised. There was an exception if a lease specifically allowed a tenant to apportion rent in anticipation of the successful exercise of a break. But in this case, the words “proportionately for any part of a year”, even read in conjunction with the break clause, did not specifically allow such an apportionment. The tenant had not paid the extra sum equivalent to one month’s rent.
The court went on to say that, even if the tenant had only been liable to pay an apportioned rent it would still have decided the break had not been validly exercised. This was because, by referencing the invoice number when making its payment, it had led the landlord to believe it was only paying the full quarterly rent demanded, but not the extra sum.
Tenants should ensure:
- they know whether they are obliged to pay the full quarterly (or other periodic) rent for a period during which they anticipate successfully exercising a break clause, or are entitled to pay an apportioned rent only;
- if they must pay the whole rent, that they know whether they are entitled to claim repayment of an apportioned part of it once they have successfully exercised the break clause (and should expressly reserve the right to do so when making the payment);
- if they are liable to pay any other sums, that they make it clear which parts of their payment should be allocated to each liability.
Case ref: Canonical UK Ltd v TST Millbank LLC EWHC 3710