eShot: Landlord and Tenant and Real Property BREAKING NEWS …. How Judges create a Rule of Law [accidentally?] … or more soberly, ”Apportionments and Rents in Advance in the Break Clause context” The issues mentioned here have raised their profile in this recession as landlords try desperately to keep tenants with good covenants and defeat the operation of break clauses. They also have arisen in an insolvency context as landlords and insolvency practitioners try to argue that rents are or are not an expense of the insolvency. If your tenant wants to exercise a break clause conditional on rents being up to date and, having given notice, a rent day comes up (typically the commercial tenant with quarterly rents in advance) does he pay the lot? Even if the break clause could be effective the very next day? Even if the amount involved is even more trivial than a full quarter’s rent, like an insurance premium rent or other minor sum designated as rent? The answer – for safety’s sake – is ‘yes’, every time. The law however is not quite as clear from the authorities (dealt with below) as might be thought -­‐ at least not in relation to break clauses. That said, a recent attempt to establish a different regime for these cases has failed in Leeds District Registry (Chancery), and the most recent case also follows a ‘traditional’ theme. We start with the older authorities. In Ellis v Rowbothamii the landlord forfeited a residential lease where the rent was reserved quarterly in advance. It was held that the landlord was entitled to sue for the whole rent due on the quarter day before forfeiture as the whole amount had become due. The court held that the Apportionment Act 1870 did not apply to amounts becoming due in full before termination of the interest. The reasoning is also interesting because it shows that any form of restitutionary/ unjust enrichment argument in relation to the rent collected for the period after forfeiture cannot succeed, essentially because the payment of the full rent had been agreed to be paid in these circumstances. Ellis was followed in Re Aspinall iiand Capital and City Holdings v Dean Warburgiii both cases of forfeiture. In the latter case the words in the demise (at the start of the lease, usually clause 1 or 2) that rent was reserved at such and such an amount and “so in proportion for any part of a year” was held not to assist at the end of the term, in apportioning rent already due up to the termination date. It is an odd turnabout because the Apportionment Act 1870 was enacted at a time when rents were traditionally reserved in arrears, and it protected the interests of landlords who forfeited part way through a quarteriv. Now it is the tenant prejudiced (although he having brought about an event of forfeiture perhaps deserves less sympathy). The law appears to have been extended to situations where surrender terminates the lease (indeed the next case being cited in the same paragraph of Woodfall as those above). The modest report of William Hill v Willen Key & Hardware (1964) 108 Sol J 482 concerned the position where there had been an agreed surrender bringing the lease to an end – that surrender being agreed without specific agreement as to the rents already paid (in advance)in relation to the period after the termination date. The court (Magaw J) held that the claimant’s attempt (by seeking to rely on an implied term in the deed of surrender) to recover rent already paid for the period after surrender must fail. However this conclusion is not that surprising because there was an express term in the deed of surrender confirming that the lessee had accepted a certain sum in full discharge of any liability of the lessor -­‐ so no implied term could displace such an express one. On closer inspection therefore there is no extension of a legal principle – Megaw J deciding his case on contractual principles as applicable to the facts of that case. So let’s turn to the break clause situation where the break is effective only if all rents are paid up to date. The last two sentences are, in the view of the writer, an important aspect in the analysis. The scenario here is contractually based. Why cannot it be argued that with an impending break, and since the matter is consensual, based on the agreement contained in the lease, either that: the rent can be apportioned at the time it became payable, because that is what the parties must have intended (particularly if the words “and so in proportion for any part of a year” or similar were found in the lease in relation to rent). Thus the matter is one of express construction of the lease, or implied term; or that at the end of the break notice period if – all other things being equal – the break was successful (and no other reason for its failure) any overpayment of rent becomes repayable, and the court should overlook the scintilla of time between the termination (when the underpaid rent is technically still due) and after termination when the rent obligation ceases? In other words all rents had been paid up to date. Surely this approach accords with commercial business common sense, or what an officious (businessman) bystander would approve. Ask yourself – or better still, ask a passing businessman – this: with a few days to an impending break, should the tenant be obliged to pay the full quarter’s rent (with no possibility of recoupment), or only an apportioned part (with an implied obligation to pay any rent shortfall should the break not occur)? Businessmen and ordinary people do not tend to give money away at least not without good reason in the commercial world. Indeed, the writer ventures to suggest the first option would be viewed as absurd. That appears to be the way the law is going. The second possibility (sub-­‐paragraph (2) in the question above) does have a potential flaw in that if the rent was unilaterally apportioned by the tenant, it runs the risk of a counter-­‐argument that if payment of the rent was a condition of the break then the condition is not met. However, such a breach could be treated as de minimis and it is allowed for in the formulation of the question to the ordinary businessman in the last paragraph. These arguments were aired in QuirkCo Investments v Aspray Transport, a decision of HHJ Keyser QC in the High Court, Chancery Division, Leeds District Registry – judgment delivered on 23rd November 2011. It was a pitched battle between two members of St Philips and Chancery House Chambers. There, the rent allegedly not paid was an insurance rent, £3,600 p.a due yearly, but only about £150 due in respect of the period up to the prospective break date 18 days away. Unfortunately for the tenant (who was worth powder and shot and who had asked his commercially astute lanlord for an apportioned invoice) the above arguments failed. The judge held there was no apportionment possible as the whole amount of the insurance rent would have been due and could not have been recovered back, and there was, therefore, no possibility of arguing any breach by non-­‐payment of the insurance rent was de minimis. Fortunately for the tenant, the judge found that on a true construction of the lease the insurance rent, due on demand by way only of reimbursement, had not been paid by the landlord so there was nothing to reimburse nor had it been demanded at the correct time. The tenant succeeded in defeating summary judgment. The case, which also involved allegations of material breach of covenant allegedly thwarting the efficacy of the break notice, has since settled. The matter further came to the courts in April 2012 before Peter Smith J. In PCE Investors v Cancer the efficacy of a break notice was again in issue and the tenant had asked for an apportioned figure from its landlord who
Research UKv
fell silent and the tenant failed to pay the lot.
It was held that the tenant had agreed to pay rent in advance as part of the overall consideration for obtaining the underlease; the full quarter's rent fell due on the September quarter day and it could not be certain that the lease would terminate on the break clause date. The break failed but at least the learned judge did approach the matter as one of contractual construction, and he did consider the ‘commercial common sense’ test of the Rainy Skyvi case. In this latter regard the judge held that there was a commercial and sensible certainty in requiring all obligations to operate until the very date of termination, and not to be retrospectively changed if an early termination occurredvii. The approach was therefore correct, being based on a contractual analysis, but surely if the tenant had paid a correct apportioned amount why was this not sufficiently in accordance with the contract either by express or implied term? Ultimately, the landlord charity succeeded. The tenant’s estoppel argument also failed. The matter, the writer submits, is one of contractual construction or implied term, and it is also suggested that the proper questions to ask and the correct answers are those set out above as appropriate to ask the ordinary businessman. In a parallel universe, insolvency, similar questions have been asked. In Goldacre v Nortel Networksviii HHJ Purle QC had to decide whether rents falling due were expenses of the administration (as the landlord argued, so that he had all his usual remedies whilst occupation continued). The judge decided that the rents were such expenses much the same as they were in a liquidation. This also included rents due in advance on the quarter days (even though it was not known how long the lease would last) – the Apportioment Act 1870 did not apply and Ellis v Robotham applied. This was of course treating the matter as one of law (insolvency law), and it does not affect the arguments and submissions otherwise advanced by this article in relation to break clauses. Leisure (Norwich) II Ltd v Luminar Lavaixhas since decided that the same is not true of pre-­‐
administration rents, but that is even more tangential to the points raised here. David Stockill St Philips Chambers, Birmingham Chancery House Chambers, Leeds (who incidentally acted for the tenant in Quirkco v Aspray) i
[1900] 1 QB 740 [1961] Ch 526, a case where the apportionment issue arose in the question whether certain sums were capital or income in the hands of an executor. iii
(1988) 58 P & CR 346 iv
I am grateful to an article by Sefton and Radley-­‐Gardener in New Law Journal 22.6.12 for this history (just published at the end of writing of this Article). v
[2012] EWHC 884(Ch) vi
[2011] UKSC 50; [2011] 1 WLR 2900 vii
Interestingly the judge took account of an Australian case, Ocelata v Water Administration BPR 97815 paras 77 to 83 where Hodgson CJ thought there to be a restitutionary remedy (based on total failure of consideration) for the rents ‘overpaid’, that is to say for the rents paid for the period after the termination. The Australian judge also went on to say that if he was wrong on that then the sums for the excess rent because repayable by implied term. These arguments were rejected in Quirkco, although the Australian case was not cited. viii
[2009] EWHC 3389 (ch) [2010] Ch 455 ix
[2012] EWHC 951 (Ch) ii