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A tenant which failed to pay £130 of outstanding interest on arrears of a yearly rent of £67,500 has been told that it cannot break its lease and will remain "on the hook" for 5 more years.

In the case of Avocet Industrial Estate LLP v (1) Merol Limited and (2) Tudor Rose International Limited [2011] EWHC 3422 (Ch), the High Court has held that a tenant's break option, which could only be operated if the tenant paid all sums due under the lease before the break date, was not validly operated where the tenant had failed to pay default interest of roughly £130 in respect of certain historic arrears, which had been brought up to date well in advance of the break date.

The tenant's break option could only be exercised if, ahead of the break date, it paid all sums due under the lease, complied with all its other obligations under the lease and paid a sum equivalent to six months' rent. These pre-conditions are very common in leases. The court was asked to consider (1) whether presentation of a cheque on the break date was proper payment of the sum equivalent to six months' rent, (2) whether the tenant had failed to pay default interest in respect of historic arrears and therefore had not made a payment due under the lease ahead of the break date and (3) whether the course of dealings between the parties had given rise to some form of waiver by the landlord in respect of default interest owed by the tenant.

Having analysed the authorities and the course of dealings between the parties, the Judge decided that tendering the cheque on the break date was acceptable in this instance. His decision on this point was fact specific to this case, so advice should be sought if you are considering tendering a cheque in similar circumstances.

The default interest provisions in the lease stated that the interest was payable by the tenant whether the landlord formally demanded it or not. The Judge considered that the tenant would usually be able to find out how much interest should be paid on any late rent payments and no demand from the landlord was required. The landlord only mentioned the tenant's failure to pay the default interest after the break date had passed and the landlord's evidence suggested that prior to the break date it was not aware that it could rely on this point. This meant the tenant could not argue that the landlord had waived its right to interest or led the tenant to believe that the interest was not due and/ or that there was a shared misunderstanding of the position. Since the tenant had failed to pay default interest it had also failed to meet a pre-condition of the break option. Therefore, the lease did not come to an end.

The Judge acknowledged that his decision appeared to be harsh on the tenant but considered that he had to reach it if the relevant legal principles were applied properly.

What you need to do

Tenants seeking to operate break options in leases that contain similar requirements should ensure that they address the issue of what, if any, interest might still be due at the break date even where they have already paid the principal arrears. The risk in not paying interest should be carefully weighed against the risk that the break option will not operate.

For further information, please contact , Head of Real Estate Litigation, , Associate, Real Estate Litigation, London or your usual DLA Piper contact.