Often leases entered into in more favourable times become uneconomic as trading
conditions worsen. During an economic downturn it is therefore common for commercial
tenants to try and seek to extricate themselves from expensive lease obligations.
This is permitted where the lease in question contains an option to allow for early
termination of the lease after the service of a break notice.
It is usual for conditions to be attached to the exercise of these notices. While
at face value conditions can often appear innocuous and straightforward, a failure
to adhere strictly to their requirements can result in the attempt to break being
invalid. If successfully challenged by a landlord, this can leave the tenant on
the hook for the full remainder of the lease term or (if the tenant is lucky), until
such other time as a break may be permitted by the lease.
This issue is of particular interest to universities who can find themselves in
the situation of being either a landlord looking to challenge a tenant’s attempt
to break; or a tenant seeking to dispose of an expensive lease to premises which
are no longer required.
A recent ruling by the High Court in the matter of PCE Investors Ltd and
Cancer Research UK ( EWHC 884) serves as a useful reminder
to tenants that the utmost caution is required in dealing with breaks; and to landlords
that a tenant’s compliance with any break conditions should be scrutinised
to ensure that they are strictly adhered to.
PCE Investors Ltd (the Tenant) occupied premises in South London owned by Cancer
Research UK (the Landlord).
The Tenant served notice on the Landlord of its intention to exercise an option
to end the lease early on 11 October 2010 (the Break Date).
In order to validly exercise the break the Tenant was required to comply with the
- vacant possession of the Premises was to be provided by the Break Date;
- “the rents reserved and demanded by this Lease” had to have
been paid by the Tenant up to the Break Date.
The Landlord’s agent invoiced the Tenant for a full September quarter’s
rent due on 29 September 2010. The Tenant responded in advance of the Break Date
confirming that they had paid an apportioned rent figure calculated up to the Break
Date and querying whether this was the correct basis for calculating the rent due.
The Landlord did not respond to this enquiry and the Tenant did not make any further
payments to the Landlord.
Shortly after the Break Date passed, the Landlord’s solicitors wrote to the
Tenant stating that in order for the break clause to be operative it was a requirement
that a full quarter’s rent and service charge be paid by the Tenant, as had
been invoiced. The Tenant sought to argue that only an apportioned sum was required;
and even if this were not the case and a full quarter’s rent was due under
the lease, the Landlord was prevented from requiring this due to its failure to
respond to the Tenant’s query. Proceedings were issued and the matter was
eventually referred to the High Court.
The High Court ruled in favour of the Landlord, confirming that the Tenant had failed
to comply with the conditions attached to the break. The reasoning provided by the
- a full quarter’s rent was payable in advance on 29 September 2010.
As there were other conditions attached to the break, the Tenant was not in a position
to know for certain that the Lease would otherwise determine on the Break Date.
Accordingly a full quarter’s rent should have been paid;
- the Landlord was not under any obligation to respond to the Tenant to
point out the mistake in paying the apportioned sum only. In any event, the Landlord
had already previously contacted the Tenant to demand payment of the September quarter’s
rent in full.
While not establishing any new law, this case serves as a useful reminder as to
the established principles the courts will follow in dealing with quarterly rents
and the exercise of break options. It is also a further warning to tenants in light
of other recent cases that conditions attached to break clauses are strictly interpreted
by the courts and a failure to comply with their requirements in any way could be
sufficient to render an attempt to break ineffective.
Lessons for tenants
- Take detailed advice on compliance duties on exercising an option to
break well in advance of when notice is served upon the landlord.
- Where there is any doubt as to the sums payable to the landlord in order
to exercise a break, ensure that the higher figure is paid to cover the rent and
any other sums due. Once the lease has been properly terminated, a tenant can at
that point approach a landlord to seek to reclaim any overpayment.
Lessons for landlords
- Take detailed advice on compliance duties on exercising an option to
break as soon as notice is received from the tenant.
- If the tenant enquires whether any breaches have arisen in relation
to the break conditions, take advice on how to answer. In many cases you will not
be under any obligation to provide a response to the tenant and silence may be the
best option. In cases where a response is required any misleading response should
Associate, Real Estate Disputes Team
T: 0870 763 1350
© SGH Martineau 2012
Later this year, universities will be able to take advantage of the government’s
innovative energy efficiency programme, the Green Deal, to improve the energy efficiency
of their buildings.
The Green Deal effectively creates a "pay as you save" financing mechanism,
which will be available from accredited Green Deal providers, to enable a range
of energy efficiency measures to be installed in homes and businesses at no upfront
cost. Instead, the cost will be paid in instalments through the energy bills in
respect of the property. The Department for Energy and Climate Change (DECC) has
indicated that it will be available from autumn 2012, initially for domestic properties
but subsequently for business premises also.
In essence, the Green Deal mechanism is straightforward. For eligible improvements,
a Green Deal provider will make a finance offer based on an assessment of the estimated
energy savings that will result from the measure, and the likely costs for the installation
work (including finance costs). If the offer is accepted, the payments agreed in
the Green Deal plan will attach to the energy bill of the property and will be paid
to the relevant energy supplier through these bills, who will then reimburse the
Green Deal provider as appropriate.
The fundamental principle underpinning the Green Deal – the so-called “Golden
Rule” - is that energy efficiency improvements to properties should pay for
themselves through the resulting savings on electricity and gas bills. However,
note the word “should”; there is no government guarantee on offer that
this will be the case, and critics have objected to the proposal that assessments
be based on average energy usage rather than actual usage of the occupants in question.
Nonetheless, what opportunities are there for universities?
Optional energy saving measures
- Student and faculty accommodation
The Green Deal draft regulations define domestic property as “a building or
part of a building intended to be occupied as a dwelling” . Therefore,
universities are likely to be eligible for the first phase of Green Deal financing,
for their student and faculty accommodation buildings.
Whether or not a building is eligible for Green Deal financing is determined by
a two part assessment process, whereby the fabric of the building is evaluated for
an Energy Performance Certificate (EPC) following which an occupancy assessment
is carried out to determine how occupants use the property to provide an indication
of whether the projections of an EPC are accurate.
Importantly, the Green Deal is not a silver bullet and universities should still
consider other means of curbing costs, notably educating students about energy efficiency.
Assuming a building is deemed suitable for Green Deal financing, installation works
could have further financial implications in terms of loss of income for summer/term
time lets, particularly where buildings become non-habitable during installation.
- Non-residential campus buildings
DECC has taken an integrated approach to the design of the Green Deal, so that the
scheme is broadly the same for both the domestic and non-domestic sectors. However,
not all properties will adhere to the Golden Rule. For example, although a
university may not find it cost effective to close the whole or part of a building
in order for more substantial energy savings measures to be carried out, it might
find it cost effective to upgrade boilers or fit lighting controls and low energy
lights which will give a much faster return on investment and which better adhere
to the Green Deal’s Golden Rule.
As the Green Deal assessment procedure for the suitability of non-domestic buildings
is more complex than for domestic properties, DECC have announced a delay to the
use of the Green Deal in the business sector.
Mandatory energy saving measures
Whilst Green Deal financing provides a non-compulsory opportunity for universities
to attain energy efficiency, amendments to the Energy Act 2011 (the Act) will impose
a restriction from 1 April 2018 on landlords to let properties with energy efficiency
ratings below band E.
Interestingly, the Act imposes a similar restriction on domestic and commercial
landlords. However, until Regulations to clarify the specifics are published, it
is unclear whether landlords who are themselves tenants (under a commercial head
lease) will be in breach of the Act or whether the obligation to make energy efficiency
improvements is one that rests on the owner of the property - the framework legislation
suggests the onus is simply on the ‘landlord’. Nevertheless, once the
Act is in force, a landlord of a domestic property will not be able to unreasonably
refuse consent to energy efficiency improvements requested by his tenant. In this
way, it may be possible that the obligation is passed up the chain. For the sake
of clarity and certainty, leases should be amended so that the obligation to ensure
the building meets the minimum energy efficiency rests with the landlord.
For universities guaranteeing occupancy of buildings under a nomination agreement
the matter is simple – the duty rests with the commercial landlord.
Interestingly, landlords responsible for buildings falling below the required standard
may continue to let them provided they either: take measures to make improvements
to the building (whether there is a minimum threshold for these is as yet unspecified),
take Green Deal financing, or benefit from the Energy Company Obligation (ECO) which
addresses instances in which Green Deal measures will not work – i.e. where
the cost of improvements outweigh projected energy savings. The ECO is not based
on carbon goals, rather it is intended to target lower income/vulnerable households
or certain property types, for example those requiring Solid Wall Insulation. However,
for older and/or listed buildings, substantial energy efficiency works may not be
possible and the Act provides exemptions where necessary consents or permissions
cannot be obtained. Essentially, this is a dilemma local authorities as enforcers
will no doubt encounter.
The Green Deal is yet to be implemented on a broad scale, and until it is, concerns
over guaranteed savings, which have been widely publicised, will remain and likely
hinder the take up of energy efficiency schemes. This is a shame, because
the scheme is innovative and has the potential to spearhead the roll out of retrofitted
energy efficiency measures across a broad range of buildings across university estates.
Senior Partner, Head of Energy & Utilities Team
T: 0800 763 1528
Trainee Solicitor, Energy, Projects and Commerce Team
T: 0800 763 1657