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Breaking up is hard to do – Operation of conditional break clause ineffective without actual payment of break penalty

Canonical UK Ltd v TST Millbank LLC [2012] EWHC 3710

Canonical was TST’s tenant under a lease. The lease contained a break option entitling Canonical to terminate the lease on six months’ notice provided the rent was paid up to and including the break date, there was no breach of covenant, and Canonical paid one month’s rent as a break penalty. Canonical gave six months’ notice to terminate the lease on 22 August 2012. Canonical paid the full June quarter’s rent and service charge and vacated the premises on 22 August. However, it failed to pay the break penalty. TST therefore claimed that the break had not been effective. Canonical argued that it was only required to pay rent up to 22 August and, as such, the balance of the rent it had paid could be appropriated in payment of the break penalty. In particular it relied upon wording in the lease requiring rent to be paid “proportionately for any part of a year”, arguing that this entitled it to apportion payment of rents up to the break date.

The court held that the break was not effective and the lease therefore continued. The words “proportionately for any part of a year” referred to the first and last years of the term.  They did not affect the tenant’s obligation to pay a full quarter’s rent on 24 June 2012 because at that date it could not be certain that the break conditions would be satisfied and the lease would determine on 22 August 2012. The full June quarter’s rent was therefore payable and no surplus could be appropriated to the break penalty. Even if the full quarter’s rent had not been due, the tenant had not taken any steps to appropriate the surplus to the break penalty prior to the break date so it could not rely upon payment by appropriation.