Breaking up is hard to do: break clauses after Sterling House

Break options are hotly negotiated when lease terms are agreed because they give tenants a way out. But miss one step and the door stays firmly shut, often for years and at considerable cost.

That is what nearly happened in Sterling House Ltd v International Baccalaureate Organisation (UK) Ltd, decided last month. The tenant’s right to break was conditional on there being no rent outstanding at the break date. Well ahead of that date, the tenant, International Baccalaureate, asked the landlord’s agents what it needed to pay. The agents invoiced rent only up to the break date, rather than the full quarter due in advance, leaving around £45,000 unpaid. To compound matters, at 3pm on the Friday before the Monday break date, the landlord hand delivered a demand for insurance rent, which was not paid until shortly after the break date.

On a strict reading of the lease, rent was outstanding at the break date so the break condition had not been met. The court nonetheless held that the lease had ended.

Saved by estoppel

The tenant won because of the agents’ invoice. Estoppel prevents a party from going back on a clear statement that another party has reasonably relied on. The invoice was a clear statement of what was due, the tenant reasonably and detrimentally relied on it when making payment, and it would have been unconscionable for the landlord to renege on its agents’ representation. As for the insurance rent, the court held that the estoppel also extended to the insurance rent. In the alternative, the court held that a demand delivered on a Friday afternoon did not give the tenant a reasonable opportunity to pay before the break date, so late payment did not defeat the break.

The very specific requirements of estoppel mean that it will only save tenants in very specific circumstances. In Avocet v Merol (2011) the tenant lost its right to break over unpaid default interest that had never been demanded. Its estoppel argument failed because the landlord had made no statement on which the tenant could rely.

Blue paper or pink paper?

The courts have distinguished between mistakes in what a break notice says and failures to meet the requirements for exercising the break. In Mannai v Eagle Star (1997), a notice that gave the wrong break date was saved because a reasonable landlord, familiar with the lease, would have known what the tenant meant. A notice served in the wrong way, at the wrong time or on the wrong person is less easily forgiven. As Lord Hoffmann famously put it:

"If the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease."

Break conditions are therefore treated strictly. In other reported cases, tenants have lost their breaks over £130 of unpaid interest and over workmen left on site after the break date.

What the RICS Lease Code says

Given the serious consequences of getting it wrong, the RICS Code for Leasing Business Premises recommends that a tenant’s break should be conditional only on paying the basic rent and leaving the premises free of occupiers, with any rent paid for the period after the break date being refunded later. The Model Commercial Lease is largely compliant with the Code so follows suit and had the Sterling House lease been based on that the Friday demand for insurance rent would have been irrelevant. Neither the Code nor the Model Commercial Lease is binding, however, and stricter conditions remain common.

Key takeaways

As with any break-up, the key is a clean exit: say it properly, settle what you owe and don't leave your things behind. Get it wrong and your clean break could turn into a messy and expensive divorce.