That may be a sensible proposal for new lending. However, the Council of Mortgage Lenders estimates that there are currently 3.9 million existing interest-only mortgages, over a million of which are due to mature before 2020. Many of these borrowers have no strategy in place to repay the loan at the end of the mortgage term.

Under the mortgage conditions, the outstanding balance will become repayable automatically on expiry of the term and the lender’s right to possession will arise, even if the borrower has maintained payments throughout the life of the mortgage. So what should a lender do in these circumstances?

Possession as a last resort

We are already seeing a number of these cases reach the stage where we are instructed to commence possession proceedings. However, the number of instructions we receive is very small. This indicates to us that lenders are going to significant lengths to explore all alternative possibilities before bringing possession proceedings in these circumstances.

Usually, by the time we are instructed, the term has expired some time ago (often several years) and a number of temporary arrangements have been in place. These may have been agreed to allow more time for the borrower to sell or remortgage the property, for an endowment or pension policy to mature, or to reduce the balance by converting to a repayment method.

Care should be taken that any arrangement which could amount to a term extension meets the requirements of the FSA’s updated forbearance guidance published in October 2011 (http://www.fsa.gov.uk/pubs/guidance/fg11_15.pdf). In particular, a term should not be extended beyond ‘retirement income age’ without an affordability assessment of the retirement income.

If no arrangement is in place, the borrower is making payments, but there is no proposal to repay the capital balance, lender clients will still consider proceeding with repossession as a last resort.

All of these files are reviewed by a senior solicitor before proceeding. When reviewing the file, we will consider the age of the borrower at the time of lending and the time of instruction, and whether a repayment vehicle was in place. In the case of repayment mortgages, we will also consider the amount of the outstanding balance and how it is constituted (i.e. whether it is mainly made up of charges and interest, where the capital balance has been largely repaid). We will then advise of any potential reputational risk or the likelihood of regulatory criticism if the claim is pursued.

Bringing the possession claim

In term-expired cases we ask for a straight possession order and these are invariably granted. The court has very little discretion to make any alternative order, in circumstances where the term has expired and under the mortgage conditions the entire outstanding balance has become due.

This is because, under the Administration of Justice Act 1970 (as amended), the court’s discretion to suspend enforcement is based on ‘any sums due’ being repaid within a reasonable period. ‘Any sums due’ is defined as the arrears (s.8 of the Administration of Justice Act 1973), and a reasonable period is no more than the remaining term of the mortgage (Cheltenham & Gloucester v Norgan [1996]).

In term-expired cases the entire outstanding balance is in arrears and there is no reasonable period remaining for repayment. As a result, the court has little choice but to make a straight order for possession.

Existing interest-only loans

This note only relates to cases where the term has already expired and the borrower has not been able to demonstrate any means of repaying the capital balance. There is obviously a very important, separate exercise to be undertaken in identifying current interest-only loans where the term still has some time to run. In these cases we would recommend that borrowers are contacted now to discuss the repayment strategy for the end of the term.

It may be recalled that a new model shared ownership lease was introduced by the Homes and Communities Agency (HCA) and came into effect on 6 April 2010. Optima Legal were approached in November 2009 for their comments and views on the proposed format during the consultation period.  We are now starting to receive instructions to act on behalf of lenders who have taken possession of properties demised by the new-style lease.

It is important for lenders to be aware of the differences between the old and new leases and how this can impact on a claim made against the landlord under the mortgagee protection provisions of the lease.

One of the main changes to the lease is the mortgagee protection clause (now known as the Mortgagee Protection Claim or MPC).  The lender may rely on the MPC when it has suffered a loss.  Loss suffered in completing a voluntary sale by the borrower/leaseholder with the mortgagee’s consent does not constitute loss under the shared ownership lease.

There is no obligation upon the lender to either (i) give notice to the borrower/leaseholder that there is a reasonable probability that a loss will be suffered, or (ii) mitigate the loss, for example by selling the premises quickly or deferring sale until values have improved so that the landlord’s payment under the Mortgagee Protection Claim may be reduced.

Under the new-style lease there is no longer an obligation on the lender to accomplish final staircasing before relying on the MPC.  However, the borrower/leaseholder must not themselves have accomplished final staircasing (ie the borrower must hold less than a 100% interest).

Calculation of the new claim

 The amount of the lender’s claim is capped at the aggregate of the following:

1. All loans advanced by the lender which are secured by a first charge over the property, provided the landlord has approved these in advance.

This covers the original amount advanced for the purchase of the initial share, plus any subsequent borrowing to finance staircasing by the borrower.

The HCA’s consultation notes state that where the loan is entered into simultaneously with the grant of the lease there will be a presumption that approval has been given to the creation of the loan unless the landlord is able to produce documentary evidence that the application for consent to the creation was refused and that notice was given to the mortgagee.  The same presumption will apply for remortgages, so long as the mortgagee is able to show it applied to the landlord for consent to make the loan. The onus of proof lies with the landlord.

2. 18 months interest on the fixed amount in point 1 above, running from the Enforcement Date.

The definition of Enforcement Date is the date on which the mortgagee commences enforcement of any of the security for the loan by reason of a default.  This is rather ambiguous and as such we would suggest that the Enforcement Date is therefore taken to be the date on which the lender first instructs solicitors to commence court action.

In the absence of enforcement through the courts (i.e. voluntary possession/abandonment) the date of actual possession should be used as the Enforcement Date.  This would then also cover the position of a voluntary possession where no default has occurred.

3. Amounts advanced by the lender in protecting its security by discharging any arrears of rent and service charges payable under the lease.

4. Fees and costs incurred in enforcing the lender’s security, capped at an amount equal to 3% of the market value of the leasehold interest at the time of enforcement.

Within this cap, the lender is able to claim any sum due to it under the loan agreement.  This will include capital, capitalised arrears, interest, administration fees, early redemption fees, costs associated with repossession, capitalised rent and service charge arrears and other costs which the lender is legally entitled to claim under the mortgage.

The new-form lease further dispenses with the need for the lender to procure a valuation of the leasehold interest.  Instead the lender is not entitled to payment from the landlord unless the sale has been made at the best price reasonably obtainable.  The burden of proof would be with the landlord to show the sale had been at an undervalue.

The previous position

The amount of the lender’s claim under leases created before 6 April 2010 is capped at the aggregate of the following:

1. All loans advanced by the lender which are secured by a first charge over the property, provided the landlord has approved these in advance.

2. A maximum of 12 months unpaid interest on the fixed amount in point 1 above, in place at the time of the borrower’s default.

3. Amounts advanced by the lender in protecting its security by discharging any arrears of rent and service charges payable under the lease.

4. Reasonable fees and costs incurred in enforcing the lender’s security.

Conclusion

There are important differences between the old and new regimes. For example, more interest is now allowed and the point of calculation has changed. Fees and costs are no longer subject to a test of reasonableness but are capped at 3% of market value.

It would therefore be prudent for lenders to flag any accounts where the shared ownership lease has been granted after 6 April 2010, to ensure that the correct calculations are used when preparing their income and expenditure statements and that the maximum claim possible is advanced.

The consensus was reached by creditors, lawyers, debt purchasers and debt management representatives at a private round table debate held by Optima Legal and Credit Today in Scotland.

For the free debt advice sector, the key challenge is whether the Money Advice Service will deliver a better debt advice offering in the face of increasing demand.

All sides agreed that more UK consumers are experiencing financial difficulty while regulation of consumer credit has increased, which is making effective debt collection and litigation more challenging and placing strain on the free debt advice sector.

For lawyers, the key challenge is how to conduct effective litigation while remaining in the parameters of compliance.

Denise Loney, Optima Legal’s Head of Litigation, Scotland, said: “The challenges for us are around compliance and presenting applications to the court that will get the best result.”

Bank creditors at the debate also pointed out that pressure to hit collection targets meant some collection agencies needed persuasion to maintain strong compliance levels.

Meanwhile, telecoms creditors said their focus was on improving collection and litigation processes, with compliance a lesser priority as their contracts are not consumer credit agreements.

Yes Loans loses licence

On 8 March, the OFT revoked the consumer credit licence of Yes Loans, together with two associated companies. The decision was based on evidence of non-compliance with the legislation and its attendant regulations, together with non-compliance of requirements previously imposed by the OFT, following an investigation into the business in July 2009. The OFT’s concern was also based around the fact that some key individuals were still involved in the business. Yes Loans has 28 days to appeal. Click here to read more.

Review launched into payday lending

On 24 February, the OFT announced that it was launching a review into the payday lending sector, during which it intends to investigate at least fifty businesses for non-compliance with the Consumer Credit Act 1974 and the Irresponsible Lending Guidance. The sector has grown considerably since the last review by the OFT in late 2010. Concerns prompting the review centre upon matters such as not checking affordability sufficiently, rolling over of loans and inappropriately targeting people who may already be over-committed. The resulting report will be published towards the end of the year.  

HMRC/CML

Update on the Mortgage Verification Scheme

The Mortgage Verification Scheme was launched in September of last year, the idea being that in cases where lenders suspected false income details were being supplied, they could cross-check the information with details held by HMRC. This would also benefit HMRC because it could highlight cases where income tax had been underpaid. So far, information suggests that only 13 lenders have signed up to the scheme, while 269 applications have been subject to verification through the scheme.
 

Financial Services Authority

Guidance consultation on PPI redress published

On 6 March 2012, the FSA published its guidance to firms who have been involved in compensating consumers for the mis-selling of PPI. Essentially, the guidance sets out how the FSA wants firms to approach and communicate with customers who may have been mis-sold the cover, but have not complained or otherwise taken steps to seek redress. Click here to read the full article.

Financial Services Bill published

The Financial Services Bill was published on 27 January 2012 and has put forward the Government’s proposed new financial regulation regime for the UK. The main themes would see:   

• the Bank of England given responsibility for protecting and enhancing financial stability;
• the abolition of the Financial Services Authority and the setting up of a new regulatory framework consisting of the Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority;
• a push towards giving authorities the power to look beyond “tick-box” compliance and foster a regulatory culture of judgment, expertise and proactive supervision.

More details will follow soon. 

Information Commissioners Office

Employee of a letting agency fined for attempted blagging offence

On 27 February 2012 an employee of a letting agency was fined £200, together with costs of more than £700, for attempting to blag personal information, an offence contrary to s55 of the Data Protection Act 1998. The employee had telephoned the DWP posing as the claimant/tenant, and attempted to obtain details of his financial situation. The DWP became suspicious when the employee could not produce the correct middle name.

Private detectives jailed for conspiracy offences

The Information Commissioners Office (“ICO”) and Serious Organised Crime Agency (“SOCA”) were involved in a long running investigation into a group of private detectives who were routinely blagging information and essentially stealing confidential data for profit. The investigation began after SOCA received intelligence that information relating to criminal activity was stored on a computer, which was later purchased by an undercover officer.

The men were each jailed for terms ranging from six months to twelve months, however custodial sentences cannot be imposed for offences under the Data Protection Act 1998 – the charges brought were for criminal conspiracy under the Fraud Act 2007. The Information Commissioner in a statement has said again that it is time for the offence of blagging to carry a serious penalty, given the distress and upset that it inflicts on people’s lives.

ICO publishes initial analysis to new EC proposal on data protection

The EC published a proposal relating to a new general data protection regulation and directive on 25 January 2012, and the ICO has recently responded with its initial analysis. Broadly, it supports the measures contained in the proposal, which seek to bring ‘paper age’ protections into the modern realm of predominantly electronic data handling. The ICO in particular welcomes the expanded definition of data subject, the ‘right to be forgotten’ and the right to object to processing/retention of personal data, although it notes that further definition/clarification will be required. It also voices concern that the proposal includes creating two different instruments, a regulation and a directive, which have the potential to cause conflict and interfere with the aim of harmonisation – particularly in relation to matters such as penalties and enforcement – unless the core definitions and methodologies are carefully aligned.

Councils must take data protection more seriously

On 10 February 2012, the Information Commissioner issued a statement in which he highlighted the need for data protection to be a real priority for councils, particularly when set against the modern backdrop of increasingly delivering services in conjunction with community partners. In the statement, he referred to the five recent incidents in which enforcement action, including undertakings, had been the result of investigations. He has put together a business case for the government for an extension of his compulsory audit powers.

In the same month, a further council was fined £80,000 for failing to take appropriate measures to ensure security and appropriateness when emailing personal information.                             

Ministry of Justice

Solving Disputes in the County Court response published

On 9 February 2012, the MOJ published its response to the consultation on Solving Disputes in the County Courts. Areas covered relate to an increase in the small claims limit to £10,000 and the scope for bringing into play the as yet unenacted sections in the Tribunals, Courts and Enforcement Act 2007. An interesting aspect of the increase in the small claims limit is that it will bring England and Wales out of step with Scotland and Northern Ireland, where the limit is currently £3,000, as well as Europe where the analogous small claims procedure operates up to a limit of 2,000 euros.

After passing the British Standards Institution certification assessment with flying colours Optima Legal’s Glasgow office joins the firm’s Bradford and Newcastle offices, which was originally awarded its ISO 9001 status in 2000 and 2010 respectively.

Optima Legal’s Head of Compliance, Emma Dimbylow comments: ISO 9001 is a mark of assurance to our clients that we operate an effective quality management system.  We are delighted that our Glasgow office has now been recognised in achieving the standards of this highly established quality mark”.

Estimates of the total paid out so far put the figure at around £4billion, with most of the sum having been paid out to those who have complained/claimed prior to or following on from the failed judicial review challenge brought by the British Bankers’ Association last year.

To re-cap briefly, the original policy statement introducing the new complaint handling rules required firms to apply the standards adopted by the FOS when dealing with PPI complaints. The effect of this approach was argued as resulting in new standards being applied to old sales, which led to it being labelled as a “back door review”.  The change in approach also introduced the ‘root cause analysis’, which requires firms to implement appropriate management controls and take reasonable steps so that in handling complaints, any recurring or systemic problems are identified and addressed. Any such findings would then be automatically included in the consideration of complaints, whether specifically raised or not, and extends to contacting affected consumers who may not have complained. This process of analysing the root causes includes evidence available about the actual sales practice at the relevant time, with reference to staff recollections, call recordings and incentives provided: it is not limited to guidance notes or scripts which were in use at the time. 

The guidance consultation is therefore aimed at bringing into full operation the root cause aspect of the new approach, and sets out requirements for communication with those potentially affected. Letters must be clear and include a full, jargon-free, explanation of when the mis-selling may have occurred. They must also include why redress might be appropriate, what steps should be taken in response and the time limits involved in making a claim. The letters must also be free of any marketing material. 

The bottom line is that any firm which has had to pay out as a result of complaints and/or claims will have to consider whether the cause of action arose as a systemic failing. This may be a time-consuming exercise. But the response may not be that of a landslide – it is recognised by the FSA that proactive approaches such as this one have historically resulted in low response rates: sometimes as low as one in ten.     

The approach highlights the limitation issue too, because once the potential claimants are written to, the clock will start to run – the FSA has previously expressed the view that simply being aware of the general fact of mis-selling would not necessarily be sufficient to amount to knowledge where negligence is the basis of claim. Any communications sent by firms as a result of the root cause analysis will presumably result in the clock ticking as the knowledge will instead be based on a specific indication: the certainty of an end point on the horizon is at least to be welcomed.

The consultation runs for 4 weeks, closing on 3 April 2012.

The revocation follows evidence of failures in complying with the legislation and its attendant regulations, together with failures in complying with requirements previously imposed by the OFT.

The OFT found evidence that Yes Loans had engaged in unfair business practices, including:      

• using high pressure sales tactics to persuade consumers to provide their debit or credit card details on the false premise that they were required for an identity and/or security check;
• deducting brokerage fees without making it clear that a fee was payable, and/or without the consumer’s consent;
• failing to introduce some consumers to the product originally sought, frequently arranging short-term, high interest, loans instead;
• misleading consumers into believing it was a loan provider rather than a credit broker;
• treating customers poorly by not providing refunds in a timely manner.

Requirements were imposed on Yes Loans in July 2009 in order to tackle its compliance issues, and although changes were made as a result, the OFT consider that the evidence of prolonged engagement in particular practices as well as the continuing presence of some of the staff involved in such practices meant that the businesses were unfit to hold the licences.

Detailed guidance for credit intermediaries, which includes brokers, was published by the OFT in November 2011. The businesses have 28 days to appeal the revocation.

As the matter raised an important point of principle the issue was transferred to the Court of Appeal. The Master of the Rolls, Lord Neuberger, gave the judgment.
The facts

The Claimants solicitors were acting on behalf of their client in a personal injury claim for a repetitive strain injury he had obtained assembling shower cubicles whilst working for the Defendant. The action had been settled shortly before trial by way of a Consent Order, for £12,750, plus the payment of the Claimants costs, to be assessed if not agreed. The costs were eventually agreed in the sum of £74,000 (which included an uplift of 60% with the Claimants acting under a Conditional Fee Agreement).

The Claimants solicitors then sought payment of the interest from the date the liability of costs was agreed under the Consent Order, otherwise known as the Incipitur date. The Defendants however, argued that the interest should run from the date the sum was formally agreed, otherwise known as the Allocatur date. The District Judge originally agreed with the Defendant, basing his decision on the judgment of HHJ Stewart QC in Gray –v- Toner (11 November 2010). The Claimant appealed and the matter was transferred to the Court of Appeal.

The judgment

The Court of Appeal ruled that the interest on costs effective date should be the original date that the payment of costs was ordered i.e. the Incipitur date. Although they found that the provision in the Civil Procedure Rules for the payment of interest on a judgment did not apply to cases in the County Court, this ultimately had the effect that the previous rules on interest on judgments still applied. These previous rules, contained within the County Court (Interest on Judgment Debts) Order 1991, stated that interest should run from the date on which the order was made where the judgment debt is over £5,000. Furthermore, there was no reason in this present case to depart from the general rule that interest payable on costs should run from the date of the order for costs.

In summary

This case provides useful clarity on the date from which interest on costs should be calculated.  There is clearly no benefit to the paying party in dragging out the assessment process when the period on which interest is payable is already running.

This case is also noteworthy and has been highly publicised due to the criticism made by Lord Neuberger of the costs claimed in this action, which were almost six times more than the claim was worth, even though they had been agreed between the parties.  He hoped that the recent changes proposed by Lord Jackson in his report on civil costs would help ensure that costs remain in future more proportionate to the action.

In the case of Tim Martin Interiors Limited (TMIL) v Akin Gump LLP (2011) EWCA Civ 1574 the mortgagee’s solicitor’s costs were directly challenged by the borrower. TMIL applied to the Senior Courts Costs Office (SCCO) for an assessment of the mortgagee’s solicitor’s, Akin Gump LLP’s (AG), costs under section 71 of the Solicitors Act 1974.

At first instance it was ordered that AG directly repay TMIL £82,768.97 of the £123,984.00 it received from the Bank of Ireland (the Bank) for acting on its behalf in respect of repossession proceedings, and which had been added to the mortgage account.

The decision was overturned on appeal to the High Court. TMIL appealed to the Court of Appeal, which dismissed the appeal and upheld the High Court on the grounds that because the Bank had paid the solicitor (AG) and the third party (TMIL) had paid the Bank, the claim lay against the Bank rather than the solicitor. The appeal court stated that “it cannot be right to require the solicitor to pay to the third party money which he received from his client and which his client was bound to pay him, merely because the third party was not liable to pay the same amount to the client.”

It was further stated that TMIL should have brought proceedings against the Bank to establish how much was due from TMIL to the Bank instead of seeking an assessment under section 71. In a mortgage case the proceedings would be conventional proceedings (probably under CPR Part 8 in the Chancery Division, or where appropriate, in the county court) for an account of what was due under the mortgage. In such proceedings it would be possible for the court to do what cannot be done under a section 71 assessment, namely to disallow part of an amount claimed on the basis that something was due but not as much as was claimed, e.g. by substituting a lower hourly rate (the rates in this case were £320 per hour).

The result of this judgment and subsequent publicity could result in the number of disputes raised by borrowers for the legal costs applied to their account increasing.

Lender’s rights considered in recent Court of Appeal decision

In Mortgage 1 Limited v Wallis [2012] EWCA Civ 226 the lender obtained a possession order in August 2009 and sought to enforce it in 2011. On 25 January 2011 the borrowers made an application to suspend the warrant which was refused. At that hearing District Judge Payne decided that, as there was no realistic prospect of the borrowers being able to meet their commitments, enough was enough and the application was refused.

The borrowers requested permission to appeal at a hearing on 14 April 2011 before His Honour Judge Compston. The appeal was dismissed as HHJ Compston was not persuaded that the position before him was any different, despite evidence of a possible sale. If the sale had proceeded it would have left a significant shortfall.

The renewed application for permission to appeal went before Lord Justice Tomlinson who agreed with the position of DJ Payne and HHJ Compston and stated that the lender had their own rights to be considered, in particular that they had an order for possession in their favour and they were entitled to know whether they were going to be permitted to enforce it. He dismissed the application as it was “overwhelmingly necessary in the interest of fairness to all parties and in the interests of justice” that the application should finally be disposed of.

Failure to make timely payment of a deposit amounts to a repudiatory breach of contract

Lord Justice Lewison sitting in the Court of Appeal was required to consider whether the failure to pay a deposit could result in a contract for sale being terminated in the case of Samerenko v Dawn Hill House Ltd [2011] All ER (D) 49 (Dec).

A contract for sale of the property known as Dawn Hill House was agreed with a purchase price of £4.5m and a deposit of £450,000. The defendant was to pay the deposit by 3 March 2011 and to complete the purchase on 13 April 2011. The defendant failed to pay the deposit and it was accepted that it was in breach of contract. By a letter dated 9 March the claimant demanded payment of the deposit by 5 pm on 16 March 2011 and the deadline time was stated to be of the essence. The defendant did not pay the deposit by the required date or at all. On 21 March 2011, the claimant notified the defendant that the breach of contract was repudiatory and that he had accepted it, thereby terminating the contract with immediate effect.

The court held that the contractual obligation to pay a deposit would always be a term of fundamental importance in the contract and as such the breach would entitle the innocent party to treat the contract as at an end.

The appeal was dismissed, reiterating the importance and purpose of the payment of a deposit in conveyancing transactions.

Claims firms set their sights on interest-only mortgages

Due to the high level of complaints regarding interest-only mortgages, it is believed that claims firms are going to target interest-only borrowers who have no means to satisfy the loan on the expiry of the term.

The FSA have estimated that in the next 10 years around 1.5 million interest-only mortgages will be due for repayment without adequate repayments measures in place. It is expected that this will result in an increase in complaints which will probably claim lenders do not do enough to help borrowers in these circumstances.

Claims firms may seek to cash in on this situation in a similar fashion to the PPI claims.

The End of Accelerated Possession Proceedings?

The recent case of Khela (by his LPA receiver) v Dainter, heard in the Birmingham County Court on 29 February 2012, has been given permission to be transferred into the Court of Appeal.

It is an appeal against a possession order made under the accelerated possession procedure following the service of a Section 21 Notice. Ms Dainter argues that the accelerated possession procedure contravenes Article 8 of the ECHR, which says the state must give respect to the person’s right to private and family life. This includes the respect for the tenant’s home. The Court of Appeal will consider the position; however, there is no suggestion that Article 8 prevents eviction: instead it necessitates the consideration that in all the circumstances is it appropriate to remove the tenant from her home.

This appeal seems to be a result of the recent Manchester City Council v Pinnock case in the Supreme Court which ruled on social landlords but refused to comment on the private sector. As the present case relates to the private sector the ECHR would not apply to the claimant, as it is not a public body. However, the court is a state body and it is the court that makes the ultimate decision to evict, meaning that the ECHR probably does apply.

The full details are not yet available but the outcome of this case could have significant consequences for the accelerated possession procedure.

North East Buyers Litigation update

The tenants are considering an application for permission to appeal in the Supreme Court and it is expected that any hearing to take place later this year.

The tenant served a valid break notice, but prior to the break date, realised that repair works would not be completed by the break date. The break date passed whilst the tenant had personal belongings and security guards at the property, as well as contractors entering after the break date. Despite numerous attempts to contact the landlord, the tenant failed to actually hand the keys back to the landlord. The landlord informed the tenant that the lease had not effectively been terminated and that it would continue as vacant possession had not been provided to the landlord.

The Court of Appeal agreed with the landlord and held that the tenant had not given vacant possession on the break date and that the break was not effective. Therefore, the lease would continue in full force and effect. It was decided that vacant possession would require the following:

• the property should be empty of people;
• the landlord should be able to enjoy immediate and exclusive occupation and control; and
• the property had to be empty of personal property.

It was a contributing factor that the tenant did not return the keys and retained exactly the same control of the property after the break date that it had enjoyed before.

It is suggested that in similar circumstances the tenant should vacate the property and return the keys on the break date, but then request permission to return to the property as a licensee to complete the work. What is certain, however, is that the concept of vacant possession is not simple and straightforward and any obligation to provide vacant possession should be considered with great care.

The other cases demonstrate the importance of ensuring that all payments due to the landlord are made prior to the break date even if those sums are in dispute.

Quirkco Investments Ltd v Aspray Transport Ltd

The landlord tried to defeat the tenant’s right to break the lease on the grounds of non-payment of insurance rent and other material breaches of the lease. The tenant defended the claim on the basis that there were no arrears at the break date because the landlord had not spent anything on the insurance and so was not entitled to demand payment.

The insurance policy was due for renewal on 30 November 2010. On 23 November 2010 the landlord presented the tenant with an invoice for the whole of the insurance premium for the year 30 November 2010 to 29 November 2011. The tenant advised the landlord that the break notice had been exercised and that the insurance premium should be apportioned for the period only up until the break date, 18 December 2010. After some mishaps with the cheque for the insurance premium being lost and cancelled, the landlord sent a cheque to the insurance broker on 24 December 2010 who had paid the insurance premium on 15 December 2010 on the landlord’s behalf.

The court ruled that on the construction of the clause in the lease, the tenant was only liable to pay the sums that had actually been spent on the insurance by the landlord. On that basis, there were no arrears at the break date and the tenant was not in breach of the conditions of the break clause, as the landlord had not actually spent anything on the insurance until a week after the break date.

The court did, however, go on to say that if the demand had been served correctly and the landlord had paid the insurance premium on 30 November 2010, then no matter how small the outstanding sums, whether they are rent, insurance rent or service charges, the break clause would not have been effectively exercised because the lease required that there were no arrears.

Avocet Industrial Estates LLP v Merol Ltd and Tudor Rose International Ltd

This case highlights how strictly the provisions within a break clause will be interpreted no matter how small the sum of money owed to the landlord.

The lease provided that the break notice could only be exercised if all payments due under the lease were paid at the break date. When the keys were returned, along with a cheque for the break premium, the landlord informed the tenant that there were outstanding charges because default interest had not been paid. The landlord stated that the tenant was in breach of the terms of the break clause because it had paid rent late some years before the break date and had not paid the interest that was due, even though it had not been demanded. The landlord also contended that, as the tenant had paid the break premium by cheque one day before the break date, it had not actually been paid because the cheque had not cleared before the break date.

The court held that it was not a requirement, according to the lease, that the landlord needed to formally demand the payment of the interest and the liability to pay it materialised when the payment became overdue and not when the landlord demanded it. Consequently, the break clause had not been validly exercised and the lease would continue. Therefore, for the sake of approximately £130, the tenant was bound by the lease for its remaining term and had to pay rent equating to a liability in excess of £300,000.

With respect to the payment by cheque, the court held that as the landlord had accepted cheques from the tenant in the past and as there was no requirement in the lease to pay in cleared funds, there was an implied agreement that the tenant could pay by cheque.

Comments

Clearly the drafting and wording of a break clause is critically important to both parties and should be prepared with the utmost attention to detail. The Code for Leasing Business Premises in England and Wales 2007 (“the Code”) recommends that the only pre-conditions to a tenant’s break should be:

• that the main rent should be paid up to date;
• that the tenant should give up occupation of the property;
• that the tenant should not leave any subleases in place.

There is no suggestion in the Code that the tenant needs to give vacant possession, nor does it address the issue of overpayments if the tenant is determined not to have any arrears and overpays to avoid the break being invalid.

The above cases demonstrate that despite the Code, the court will consider each lease according to its terms and on a case by case basis. Therefore, it is not only the drafting of the lease that is relevant but also the actions of the parties which will be vital to the court’s decision.