Fraud fallout: Can lease break clauses survive payment interception?

The facts

The case centred on a tenant attempting to exercise a break clause in its commercial lease. The clause contained a common break condition, which required the tenant to pay all sums due under the lease by the break date.

The tenant paid service charges of £95,111.40, but the landlord's agent's emails were intercepted by a fraudster who sent altered payment details to divert the payment. The issue was whether the tenant could argue that payment to the fraudster was good payment based on apparent authority from the landlord's agent.

The trial had been listed under the 'Shorter Trials Scheme', which makes provision for the early identification and approval of a list of issues in dispute. However, importantly, the previously approved list did not refer specifically to this agency argument.

The decision

The judge held that the tenant was effectively seeking approval to revise the approved list of issues. However, the request was deemed to be made too late in the proceedings, preventing the tenant from advancing any positive case regarding the payment to the fraudster.

The practical effect of this is that the tenant can no longer argue that the break clause was validly exercised, meaning the tenant's lease will continue.

Key take-aways

Although the court did not ultimately rule on whether payment to a fraudster constitutes compliance with a break condition of this nature (as the court ruled it was too late to make this argument in this case), this question will likely arise again as fraudsters become increasingly refined at intercepting payment information. Tenants and landlords alike would be prudent to implement robust payment verification processes to mitigate against risks associated with fraud.

More generally, the case reinforces the fact that exercising a break clause is not straightforward. Courts have repeatedly demonstrated that they will interpret these clauses strictly, leaving little room for error. For tenants, failing to meet the precise requirements of a break clause can result in substantial financial consequences, as the lease will continue, potentially for several additional years. In this particular case, the tenant will unfortunately be liable for a seven-figure sum in further rent, which might have been avoided had some further steps been taken to verify the payment details.

The case also serves as a reminder of the importance of precise legal drafting and thoroughly considering your legal arguments and position from the outset. Landlords may want to consider including wording in their leases to confirm that if a payment is made to a fraudster in error without reasonable verification checks being carried out, this will not count as good payment. 

For more information or advice on this case or on break clauses more generally, please contact Jennifer Wilson in our Commercial Property team.