A tenant’s right to break – tips and traps4th October 2019 4:15 pm Comments Off on A tenant’s right to break – tips and traps
In recent years, commercial tenants have taken shorter leases or leases with break clauses in order to allow them flexibility due to uncertainty in the economic climate. A break clause allows a tenant a right to terminate its lease before the expiry of a fixed term.
Serving a break notice should be a relatively straightforward exercise but often is not so. There have been several cases that have reached the Court to determine whether a break notice is valid. Here is a brief summary of tips and traps for a tenant to consider when negotiating a lease and when exercising a right to break.
Agreeing a break clause
Before signing a lease, it is essential that a tenant is aware of the criteria to be met before it can break the term of its lease. Break clauses are usually subject to certain conditions being complied with sometimes at both the date on which the notice purporting to exercise the break clause is served by the tenant and at the date when the break is intended to take effect (“the break date”). Failure to meet these conditions means a break notice will be invalid. Typical examples include:-
(a) the tenant must have performed its covenants in the lease; and
(b) the tenant must have paid its rent to date; and
(c) the tenant must have given vacant possession of the premises.
If the lease says that all covenants must be performed by the tenant at the date of the break, then this will include the covenant to repair the premises. Usually at the end of a fixed term, a landlord will check the condition of the premises and serve a schedule of dilapidations if the premises are in poor condition. Having the break being conditional on the performance of all covenants in the lease will mean that if the premises are not in the condition agreed in the lease, the tenant will lose its right to break. If this condition cannot be deleted in the agreeing of a lease then it should be made conditional upon the tenant being only in material breach of its covenants. Payment of interest on any unpaid or late payments due under the terms of the lease is usually a tenant covenant too. This could mean that if you were late paying something due to the landlord at some point since the lease term began, even if you don’t know that there is unpaid interest payable, you are in breach of the tenant covenant to pay interest. The best ways to ensure that this does not frustrate you validly exercising a break clause is to (a) make sure you don’t make any payments later than the due date, (b) include wording in the break clause that means that you will only be in breach if the sums of money have been formally demanded and (c) ask the landlord in writing to confirm that all sums due under the lease that are payable have been demanded and have been paid.
“Rent” is often defined in a lease to include not only the annual rent but also service charge and insurance payments, called service charge rent and insurance rent. It is quite common for a tenant to dispute the amount of the service charge it pays during the term of a lease. If this is the case, when the tenant tries to exercise its break, then the right to break can be defeated by the tenant not having paid all the service charge up to date. Again, if this stipulation cannot be deleted in the agreeing of a lease then it should be made conditional upon the tenant paying his annual rent only up to the date of the break. Tenants should also note that the annual rent is often stated in the lease to be payable quarterly in advance. For the annual rent to be “paid up to date” properly, the tenant needs to have paid all the annual rent that has fallen due at the last rent payment date – usually a full quarter of rent – not just the rent that is payable up to and including the break date. Provision for repayment to the tenant of any rent paid prior to the break date but which applies to a period after the break date should be included in the break clause. As in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor (2015) UKSC 72 that part of the quarter’s rent paid in advance for the time after the break date will not be refunded if such a clause is not included.
Often a right to break is subject to the qualification that the tenant must have given “vacant possession” by the break date. This means that not only must the tenant be out of the premises physically but also all of its property, such as desks and furniture. This will also include tenant alterations to the premises having to be removed prior to the break date as in the case of Riverside Park Limited v NHS Property Services Limited (2015) EWHC1313 (CH), and ensuring that any workmen or contractors who were removing such alterations or carrying out repair or decoration works have left the premises. Again, if this requirement cannot be negotiated out of the lease, it is better for the tenant if the requirement is for the tenant not to be in occupation rather than vacant possession being given.
It is also important that the lease is clear in specifying how much notice needs to be given, whether in writing, and how and when the notice is sent. The Court has in the past adopted a literal approach, such as in the case of Mannai Investments Ltd v Eagle Start Life Assurance 1997, in which the judge said “if the clause had said that the notice had to be on blue paper it would have been no good serving a notice on pink paper”. From a tenant perspective you need to try to avoid wording such as “on giving 6 months’ notice” if the lease refers to a specific break date such as 1st July 2020. In those circumstances, it is very likely that only exactly six months’ notice will be acceptable, not a day more or less! Wording such as “on giving not less than 6 months’ notice” is much easier for a tenant to ensure strict compliance.
When exercising your break clause
Whilst it may seem obvious, the lease must be read very carefully before a break notice is sent to the landlord on behalf of the tenant. There have been several cases concerning whether a tenant’s break notice was invalidated on the ground that it had misidentified the tenant, such as in Prudential Assurance Co Ltd v Exel UK Ltd (2009) EWHC. A break clause may state that the break notice has to contain the correct termination date. Sometimes a lease will require a break notice to be served on the tenant at its registered office so it is important that the lease is read as a whole and not just the break clause considered.
Leases usually now contain clauses stating how notices are to be sent. If it doesn’t, at common law actual physical receipt of a notice is usually necessary. Posting a letter, therefore, may not be enough.
Legislation does provide for serving contractual notices in Section 196(3) and 196(4) of the Law of Property Act 1925. Sometimes it is possible to effect “good” service by serving a notice on the landlord’s agent. It is hugely important, however, to focus on what the lease says regarding service and timing. The case of Hotgroup Plc v Royal Bank of Scotland Plc 2010 is clear that a break right will be defeated if the break notice was not deemed served on the landlord in time.
All of the above shows that exercising a break clause is not as easy as it may appear and in times of economic uncertainty or quiet markets, landlords are not likely to overlook failure to fully comply with a break clause or to give you the benefit of the doubt if you might have got something wrong! If you fail to exercise your right to break the contractual lease term validly, you will remain tied in to the terms of the lease for the rest of that contractual term, unless the lease permits a break clause to be exercised at more than just one point in time. Even if you have a “rolling” break clause (i.e. one that allows the tenant to break the lease early at any time upon giving not less than 6 months’ notice to the landlord) it is extremely likely that the notice period to exercise that break will be at least 6 months and if your business is struggling or cash flow is tight, paying the rent for those extra 6 months could be a big problem for you. The safest course of action is to ensure that you get comprehensive advice from a specialist commercial property solicitor when negotiating the terms of your lease (including your break clause!) and again when you come to exercise the break clause. This will avoid you falling into any of the common traps – of which there are many! – that could invalidate your right to break and prove very costly in the long run.
If you require advice when taking a lease or on exercising a right to break, please do not hesitate to contact the Commercial Property Team at Colemans via Dara Galic or Kate Williams by telephoning 01628 631051.
Categorised in: Residential Property
This post was written by Colemans Solicitors LLP