Background
The Claimant, QuirkCo Investments Limited, was the landlord of the Defendant, Aspray Transport Limited, the tenant of commercial premises in Castleford, West Yorkshire ("the Property") pursuant to a 15-year lease dated 3 January 2001 and expiring on 17 December 2015 (the “Lease”).
The Lease contained a conditional break clause, under which the Lease was stated to be terminable on 18 December 2010 by the giving of not less than 9 months’ notice providing that certain conditions had been fulfilled at the date of expiry of the break notice on 18 December 2010. These conditions included both a no material breach condition and a no rent arrears or other sums payable condition.
The Defendant served its break notice in accordance with the Lease. However, the Claimant subsequently commenced proceedings arguing that the Defendant’s break notice, whilst validly given, did not have the effect of terminating the Lease because the Defendant was in breach of the conditions: namely that it had breached the repairing covenant, and also that it was in arrears of insurance rent. The Claimant accepted that there were triable issues vis-à-vis the repairing covenant, but sought summary judgment in respect of the insurance rent arrears.
Insurance Rents – the Lease
The Lease required the Tenant to pay for insurance rents: “Within 14 days of written demand therefor and by way of further additional yearly rent without any deduction such yearly sum or sums ("the Insurance Charge") (and so in proportion for any part of a year) as the Lessor may from time to time expend in insuring and keeping insured the demised premises…”. The Lease also required the Landlord to keep the Property insured and to provide the Tenant with evidence of the insurance policy (including receipts of payment) “whenever reasonably required”.
The Claimant sent the Defendant an invoice for the insurance rents on 1 December 2010, at which date the Claimants had not paid for the policy. Ultimately the Claimant’s insurance brokers paid the insurance premium on behalf of the Claimant on 15 December and the Claimant reimbursed the brokers on 11 January.
What did the Parties say?
The Defendant argued that the Claimant was entitled to demand payment of the insurance rents only in respect of such sums as it had actually spent on insuring the Property. As the Claimant had expended nothing on insurance at the date of the demand to the tenant (the invoice dated 1 December), the Defendant was not liable and therefore the Defendant’s break notice was intact.
The Claimant disagreed on the basis that the Defendant's case did not take a commercial view of the Lease and saying that payment of the insurance premium was not a pre-condition of the Landlord's entitlement to demand payment of the insurance rents.
What did the Court have to decide?
The issue before the Court was whether or not the Defendant was in arrears of the insurance rents and in particular whether the Landlord needed to have expended money on the insurance premiums before the Tenant became liable under the clause.
In order to decide this question, the Court had to construe the relevant portion of the Lease, which was the phrase “such sums… as the Lessor may from time to time expend in insuring…”.
How does a Court construe a lease?
Before the Court reached its decision, it summarised what was required of it in terms of construing a document. It noted that the object of construction is for the court to read the relevant clause and to give effect to the parties’ intentions. In order to do this, the Court needs to give the words used their natural and ordinary meaning in the context of the agreement and the parties’ relationship but from an objective, and not subjective point of view.
What did the Court decide?
The Court ultimately held in favour of the Defendant and said that at the date of the demand, because the Claimant had not paid out any funds in respect of the insurance premiums, there was no liability for the Defendant to have failed to have discharged. As a result, on the issue of the insurance rents alone, the Lease was not continuing, but of course the issue surrounding the rent repairs remains to be decided.
In order to reach its decision, the Court first looked at the natural meaning of “expend” and said that given its natural and ordinary meaning it considered that it meant “to pay” or “to lay out”. The Court then considered the meaning of the words “may … [expend]” and held that they did not mean that the Landlord could demand payment whether or not it had spent any money, but instead that at the time of the parties entering into the Lease, the sums in question were “both future and indeterminate”. Finally, the court cited as further confirmation for adopting the Defendant’s interpretation of the insurance rents clause the fact that the Lease required the Landlord to provide the Tenant with receipts for the payment of the insurance premiums.
What does this mean?
In a difficult market, cases in which landlords are fighting to keep tenants on the hook are increasingly common. Tenants serving break notices should make sure that they have complied with all relevant obligations, monetary or otherwise. Of particular note is the Court’s comment that there is no de minimis threshold below which a tenant’s failure to pay a sum will be irrelevant. To the contrary, a failure to pay any amount, no matter how small, could result in a notice served under a conditional break notice being invalidated. If you are a tenant and have any doubt about your obligations, you should consult a solicitor.
Case: QuirkCo Investments Ltd v Aspray Transport Ltd [2011] EWHC 3060 (Ch)
For more information, please contact Beverley Vara on beverley.vara@allenovery.com.