Tenants beware: exercising a break option can be costly

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Tenants exercising a break option must pay the full quarter’s rent, where this is a condition in a break clause, even when the break date falls well before the following rent due date. Failure to do this will result in an ineffective break notice and the lease will not terminate.

In Canonical UK Ltd v TST Millbank LLC (2012), the claimant tenant served notice on the defendant landlord to exercise its right to break the lease. The break date was 22 August 2012.

A condition of the break clause required the tenant to have paid rent up to the break date. The tenant argued that it was not required to pay the full quarter’s rent due on 24 June 2012, but that only the apportioned rent to 22 August 2012 should have been due. The tenant had in fact paid a full quarter’s rent, but the lease also required the payment of an additional month’s rent as a premium on exercising the break. That payment had not been made.

The court did not accept the tenant’s case. It said that the tenant was obliged to pay the full quarter’s rent up to 28 September 2012, even though the break date was 22 August 2012, and despite the reddendum in the lease reserving rent “proportionately for any part of a year”. The court held that this wording applied only to the beginning and end of the contractual term, not to any broken quarter. Consequently, the tenant had failed to comply with the conditions under the break clause, and the lease had not been properly terminated.

This case provides a warning to tenants wishing to exercise a break option and to their advisers. When negotiating a lease, a tenant should ensure that the break dates specified in the lease fall shortly before the rent payment dates, in order to avoid having to pay a full quarter’s rent beyond the break date. If this is not possible, it should at least ensure that the lease contains very clear wording to deal with the proper rent treatment of broken quarters.

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