Lack of interest lands tenant in hot water

The message: Legal principles can take precedence over fairness.

The case: Yet another landlord has successfully defeated a tenant’s break clause on a technicality (Avocet Industrial Estates v Merol, 19.12.11). The right to break a lease early is valuable for a tenant but its exercise often involves overcoming hurdles, some of which the tenant may not even be aware of.

In this case, Avocet, the landlord, had let commercial premises in Gloucester to Merol, the tenant, for 10 years from 1 February 2005 at £67,500 a year, with a right to break on 17 March 2010 on giving at least three months’ notice. The lease, however, stipulated that the break notice would be ineffective if all sums due under the lease had not been paid, or if there was any material failure to repair, by the break date. The tenant also had to have paid six months’ additional rent as a penalty for exercising the break.

In August 2009, the tenant’s solicitors served the break notice and then wrote to the landlord on a number of occasions in relation to the tenant paying all rents, service charges and insurance premiums, and satisfying the various conditions attached to the right to break. On 16 March 2010, the tenant delivered to the landlord a letter with a cheque for six months’ rent and the keys to the premises. The letter stated that the tenant had paid all sums due, carried out all repairs and satisfied all conditions.

It was not until 7 April 2010 that the landlord sought to dispute that the lease had been terminated correctly. It then wrote to the tenant claiming the break was ineffective as the six months’ rent payment had not been received in cleared funds by the break date and there was at least £130 due by way of interest for late payment of previous rent and service charge instalments.

Regarding the first issue, the general rule is that a cheque is not legal currency and will not discharge a debt unless the parties have agreed to make and accept payment in this way. As Avocet had accepted payment by cheque, and a cheque that clears is deemed to have effected payment when tendered, the court held that the tenant had paid the six months’ additional rent in time.

Accordingly, the outcome depended on whether the tenant had failed to pay interest on the late payments and so had not paid all sums due by the break date. The tenant relied on the fact that the landlord had never demanded or mentioned the interest claimed being due. It argued that the landlord had to make a formal demand or make clear what was due before any liability could arise.

The landlord argued that the lease provided for default interest on late payments to be payable at 4% above the base rate of National Westminster Bank and it was perfectly possible for the tenant to have calculated and paid what was due. So there was no need for a formal demand to be served to first make clear what was payable.

The court appreciated that the liability to pay interest even if not demanded was a rather unfair trap for the tenant, but it could find no way of construing the lease to allow the tenant to escape it. It held there was no requirement for the landlord to have first demanded payment or calculated what was due and that it had not waived the right to interest. The interest was due before the break date and the amount was sufficient to render the break ineffective, as the size of the breach was irrelevant.

The court acknowledged that its decision was harsh, as the tenant remained liable for a further five years as a result of not paying an insignificant sum it did not even know was due. However, it concluded that it was one it was obliged to reach.

Summing up: Avocet Industrial Estates v Merol

• Merol served a break notice on its rented premises and acted to satisfy all conditions to break, including delivering a cheque for the requisite six months’ rent to the landlord
• Avocet disputed that the lease had been terminated, as the cheque had not cleared by the break date and interest had not been paid
• The court held that Merol was liable to pay the interest and remained bound to the lease.

First seen in Property Week, 3 February 2012