Tenant’s break clause deemed invalid because of one minor breach of covenant

The High Court has ruled, in Sirhowy Investments v Henderson [2014] EWHC 3562 (Ch), that one minor breach of the repairing covenant, by a tenant, invalidated its break notice. This cost the tenant £70,000.

Background

The landlord leased the premises to the tenants for their second-hand car business. The lease contained a break clause for the tenant, in the event that the local authority objected to the use of the premises. The tenant received an objection and tried to break the lease. The landlord alleged the break was invalid.

When the tenants originally started using the premises in the location, transporters delivering vehicles could turn on adjacent scrubland owned by one of the directors of the landlord. This stopped being possible when a car compound was constructed on the land, by the director, for another car company. As a result the transporters had to load/unload on the public road.

The local council served a breach of condition notice on the tenants stating that the original planning agreement, for using the premises was granted on the basis of there being a private turning area. Unless the tenants were able to create a turning area, they would have to cease using the premises for the sale of motor vehicles. They did not comply with this and the council started legal proceedings for breach of condition. As a result the tenants wrote to their landlord to break the tenancy agreement.

The issues

There were two main issues argued in the High Court: 1. Had the break clause actually been triggered - had the council actually objected to the use of the premises? 2. Whether the break conditions been complied with: a) Had the tenants used all reasonable endeavours to secure planning consent for the permitted use; and b) Had the tenants paid the rent and observed and performed the covenants in the lease?

The decision

In answer to the first question, the court decided that the break clause had been triggered.

In answer to the second, whist it was clear that the tenants had taken steps to resolve the planning problems, and the court was satisfied, their argument fell down concerning the break conditions. They had paid the rent and observed all covenants, bar one - relating to state of repair. Whilst the landlord took a scattergun approach to listing various supposed breaches of covenant, none stuck with the exception of one, relating to the state of repair of the fence. The lease required the tenants to effect repairs in keeping with the remainder of the fencing. Because they had repaired it with sheeting, which was not in keeping with the remainder of the fence, they had failed in their repairing obligations.

In conclusion

Whilst one must almost certainly feel sympathy for the tenants (who had to pay the landlord damages of £70,000 with interest and costs) the court clearly thought it had no choice but to rule in this way, based on the facts. Tenants with conditional breaks should be warned that they must comply strictly with any conditions.

Although it is not binding on landlords, The Code of Practice for Leasing Business Premises in England and Wales 2007 (The Code) states that the only pre-conditions to tenants exercising any break clauses should be;
1. that they have paid up the main rent to date; and
2. give the landlord vacant possession of the property; and
3. leave behind no continuing subleases (sometimes referred to as underleases)

The Code states that disputes about the state and condition of the premises, or what has been left behind or removed, should be settled later (as with normal lease expiry).

It is clear in this case the break should have been unconditional. This particular break clause was not a standard conventional break to give the tenants flexibility, it enabled them to terminate the lease and any liabilities when it was unable to use the premises for the purposes for which it was granted.

It is likely the tenants will wish to appeal the decision…given the costs involved it is unclear whether they will have the funds to do so.