Conditional break rights: rent traps for tenants

These days, tenants have to negotiate a seemingly endless succession of traps in order to exercise a conditional break right successfully. The recent case of QuirkCo Investments Ltd v Aspray Transport Ltd [2011] EWHC 3060 (Ch) offers yet another example of what can go wrong.

The landlord, QuirkCo, tried to defeat its tenant's break right on the grounds of non-payment of insurance rent. The tenant, Aspray, had successfully served a valid break notice on 10 March 2010.

In November, QuirkCo invoiced Aspray for the insurance rent, having sent a cheque to its insurers for the next year's premium. Believing that it should only have been invoiced up to the break date, 18 December 2010, Aspray offered instead to pay £151.50 (although, in fact, it did not pay anything).

Since the break right was conditional on there being no arrears of any rents at the break date, Aspray would ordinarily have lost its break. Luckily for Aspray, the landlord's cheque to its insurance broker had gone astray, and a replacement cheque wasn't banked until January 2011.

Aspray argued that QuirkCo had not been entitled to demand the insurance rent when it did, because its obligation under the lease was to pay a proportion of the sum expended by the landlord in insuring the property. In other words, the landlord had to incur expenditure before becoming entitled to recover it. As a result, reasoned Aspray, there were no arrears of insurance rent on the break date. The court agreed. A lease could permit a landlord to demand payment before expenditure, for example by allowing the landlord to recover the sum as soon as it had been incurred, but this lease did not.

By way of counterclaim, Aspray tried to recover part of the basic rent it had paid on 29 September 2010, for the six days between the break date and 24 December 2010, the end of the September quarter. The court ruled against Aspray on this point. QuirkCo was entitled to retain the full amount of the rent, notwithstanding that the lease had subsequently determined, because the rent had become due before the break date.

But is this fair? The amount of rent overpaid in this case was £2,160.31. In some instances, much larger sums will be involved, and tenants will struggle to understand why they have to pay rent after the lease has determined. However, 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). 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 extremely unusual under commercial leases.

Tied to the lease

A tenant will only be entitled to a refund if the lease supports such a claim. Where (as is often the case) there is no express provision for repayment, the courts will look at other terms in the lease to see if they support the tenant's claim. In this case, however, the court did not accept Aspray's argument that the reddendum, which stated that rent was payable yearly 'and so in proportion for any period less than a year', entitled it to a refund. That wording, said the court, was intended only to deal with the fact that the lease did not begin on a quarter day, so that the very first payment of rent had to be apportioned.

When negotiating a new lease, tenants will usually have to accept a condition that they are up to date with the basic rent, and the Code for Leasing Business Premises recommends that additional payments should not be included. The code does not address overpayments, which should be dealt with by allowing the tenant to:

• apportion the final payment of rent, and any other sums due, up to the break date; and
• recover any overpayments of sums paid before the tenant serves its break notice.

In addition, or at the very least, the break date should fall at the end of a completed rent quarter, and not at the start of a new one.

These conditions are important. In Avocet Industrial Estates LLP v Merol Ltd [2011] EWHC 3422 (Ch), the landlord successfully argued that non-payment of default interest that had accrued before the break date meant the tenant had not complied with the requirement to be up to date with all the rents, even though the landlord was holding a £19,800 rent deposit, which easily covered the meagre debt of £130.

Where the lease contains no provisions to make apportionments or claim a refund, tenants should 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.

The amount a tenant may lose through irrecoverable overpayments will almost certainly be less than the costs of continuing liability under the lease.