Avocet Industrial Estates LLP v Merol Limited


The Message

Legal principles can take precedence over fairness.

The Case

Yet another landlord successfully defeats a tenant’s break clause on a technicality. The right to break a lease early is a very valuable right for a tenant but its exercise often has to involve overcoming substantial 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 Limited, the tenant, for a term of 10 years from 1 February 2005 at a rent of £67,500 per annum with a right to break on 17 March 2010 on giving not less than 3 months notice. The Lease, however, provided 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 had to also have paid 6 months additional rent as a penalty for exercising the break.

In August 2009, the tenant’s solicitors served the break notice and they 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 containing a cheque for 6 months rent and the keys to the premises and the letter stated that the tenant had paid all sums due and carried out all repairs and satisfied all other conditions.

It was not until 7 April 2010 that the landlord sought to dispute that the Lease had been terminated correctly. On that date, it wrote to the tenant claiming the break was ineffective as, firstly, the 6 months rent payment had not been received in cleared funds by the break date and, secondly, there was at least £130 due by way of interest for late payment of previous rent and service charge instalments.

Insofar as the first issue was concerned, the general rule is that a cheque is not legal currency and will not discharge a debt unless the parties have expressly or impliedly agreed to make and accept payment in this manner. As Avocet had consistently accepted payment by cheque, and a cheque which clears is deemed to have effected payment when tendered, the Court held that the tenant had paid the 6 months additional rent in time as the landlord had through its conduct agreed to accept payment in this manner.

Accordingly, the outcome of the case depended on whether the tenant had failed to pay interest on the late payments and, thereby, had not paid all sums due by the break date? The tenant relied on the fact that the landlord had never demanded or made any mention of the interest claimed being due. It argued that the landlord had to make a formal demand and/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,, unlike the position with service charges and insurance premiums, 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 constituted a rather unfair trap for the tenant when it came to exercise the break clause but it could find no way of construing the Lease to allow the tenant to escape this trap. It held there was no need or requirement for the landlord to have first demanded payment or calculated what was due and that it had not, through its conduct, waived the right to payment of interest. The interest had fallen due before the break date and, even though only £130 was due, this was sufficient to render the break ineffective as the size of the breach was irrelevant.

The Court acknowledge that its decision was a harsh one as the tenant remained liable under the Lease for a further 5 years simply 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.