By Jatinder Kandola
Borneo Martell Turner Coulston
BREAKING up in the context of commercial leases of business premises is not necessarily a bad thing. It can be vital to the ongoing strategic direction of a business. I am, of course, talking about break clauses.
A break clause will give one or both parties to a lease the right to exit the lease at a certain date during the term of it. On the face of it, this may seem straightforward. However, experience and case law in this area show that exercising a break clause can be fraught with difficulties, for the unwary.
Some leases allow the tenant to end the lease on notice to the landlord. Often this is referred to as the Break Notice. Such a provision might require notice to be given on a specified date or dates or at any time after a certain date. Compliance with the procedure to serve a Break Notice is only one hurdle to successfully exercising your break clause.
If there are pre-conditions to the break clause, these must be met too. For example, the break clause may require payment of all sums due and compliance with all other covenants in the lease such as the repairing and decorating the covenant.
The 2007 Lease Code recommends that: “The only pre-conditions to a tenant exercising any break clause should be that they are up to date with the main rent, give up occupation and leave behind no continuing sub-leases. Disputes about the state of the premises or what has been left behind or removed should be settled later.”
The reason for the recommendations in the Lease Code is because the courts construe the words of a break clause strictly and the case law shows that any conditions attached to the break clause must be strictly performed.
It is good practice to ask your agent (if one is acting) to only agree to an unconditional break clause and to discuss the Heads of Terms (the terms of the agreement) with a solicitor before agreeing to be bound by those terms. Negotiation surrounding the conditionality of a break clause can become protracted and so it is best to agree at the outset that there are to be no conditions attached to the break clause, other than, the ones recommended by the Lease Code. This will help to save time and costs once you reach the stage of negotiating the lease.
If a condition is not strictly met, it can cause huge problems for the tenant, who may, without taking legal advice serve a Break Notice on their landlord. Case law shows that where the conditions are not strictly complied with, then the party seeking to exercise the break clause may be defeated. The subsequent financial ramifications could be dramatic. There are cases where the tenant’s right to break the lease have not been upheld because of trivial breach of conditions.
Top tips” when dealing with Break clauses:-
– Review the lease and notice provisions. If you feel that operating your break clause is essential then do not leave consideration of how the clause works to the last minute. Careful consideration of how the break clause works and what you have to do to take advantage of it is crucial.
– Take legal advice early. There may be a long lead in time, sometimes up to six months.
– Note the importance of serving the notice on the correct landlord. It is not unheard of for notices to be served on former landlords. If this were to happen the break clause would fail.
– Keep evidence of how service of the notice was effected and evidence of compliance with the other conditions, to help protect your position.
– Keep evidence of the method of posting or delivery of the Break Notice. If the lease does not provide for service provisions, it is good practice to ask the landlord to acknowledge receipt of the notice.
– Consider instructing a surveyor to carry out a compliance audit before serving the Break Notice so that you have ample time to either negotiate or undertake any works required.
– In the event that works are required then ensure they are completed in good time so that vacant possession can be given by the break date.
– Ensure any payments are made in cleared funds in good time prior to the break.
– Pay all disputed sums. You can dispute liability after the break date. Disputed sums can be paid without prejudice to your right to exercise the break clause.
– It is important to check payment history to assess whether any interest has accrued on any late payment.
– Also be aware of last minute claims for any unpaid service charge which may have become due and need to be settled if the lease requires payment of all sums demanded. Best practice would be to ensure someone is on hand to settle any last minute claims.
– Make provision early to deal with any sub-tenants or other occupiers so that you can be confident that you will be able to yield up, that is to say, return the property to the landlord in accordance with the lease provisions.
In a changing economic climate, commercial tenants are looking to negotiate more favourable terms and choosing to exercise break clauses in their leases. As landlords are anxious to maintain their income and tenants are cautious about the future ahead, break clauses or break rights have become a common feature of lease negotiation. Be sure that you are aware of the pitfalls.
For more information, contact Jatinder Kandola on 01604 622101.
