Ask the Expert
Warning to tenants: Treat break clauses with care! A break clause could be very useful to the tenant’s business. In the case of a retail tenant, it could provide an opportunity to end the lease early and move to new premises which have become available in a better location on the High Street. Alternatively, it could be used as a bargaining tool to negotiate more favourable terms with the landlord for the existing lease. Not unreasonably, a tenant might assume that, having agreed a break clause with its landlord, there should be no problem with exercising it. This would be a dangerous assumption to make.
James Picknell Mundays LLP www.mundays.co.uk Most retailers (and commercial occupiers) enter into a formal lease of their premises. The lease is a crucial document which can contain key dates to be observed and, in some cases, used to the advantage of the tenant’s business. However, the terms of the lease are all too often forgotten and overlooked shortly after the ink is dry following completion of the lease. The purpose of this article is to highlight an example of one such term.
Break clause A lease may contain a break clause which gives the tenant the right to terminate it early following service of the required notice and, in most cases, subject to satisfying other pre-conditions.
In recent years, there have been many reported court cases which concern challenges to attempts by tenants to exercise break clauses. The general rule is that the court requires strict compliance with break clause provisions. It is therefore essential that any tenant with the benefit of a break clause: 1. Diarises the break date upon signing the lease and the deadline for serving notice; and 2. If they want to exercise the right, retains a solicitor as early as possible in advance of the deadline and instructs them to serve the notice and advise on the steps to be taken to comply with any break clause conditions. When problems arise with the exercise of break clauses it is almost always after the break date has passed. By that date, the tenant is likely to have moved out of the premises and committed funds and the business to new premises.
This gives rise to the prospect of remaining bound by the terms of the lease for its old premises and paying the rent on its new premises. The following points are examples of some of the issues which can arise when exercising a break clause and, therefore, why it is important to seek legal advice as early as possible: 1. Break clauses sometimes require the tenant to give vacant possession of the property by the break date in order for the lease to terminate. Such a condition is not always easy to satisfy. It requires careful consideration with your solicitor and a building surveyor. In a recent case, the court held that a tenant had failed to give vacant possession because it had not removed demountable partitions. 2. Break clauses often include a pre-condition requiring the tenant to have paid all of the rent due up to and including the break date. The break date might fall between or on a rent payment day. A tenant might question whether this entitles it to apportion the rent it pays up to and including the break date. Whilst each case will turn on the terms of the particular lease, it is often the case that the tenant must
pay all of the rent which falls due for the whole of the rent period (despite the fact that it relates to a period beyond the break date). A lease might include a right for the tenant to have the rent apportioned and reimbursed to it if the break clause is exercised successfully. Failing this, it is likely that the tenant would not be entitled to insist on the rent being apportioned as was found to be the case in a recent decision of the Supreme Court. 3. The break clause may require the tenant to leave the premises in the condition required by the lease on the break date. Such a term requires very detailed and careful planning with your solicitor and a building surveyor a long time in advance of the break date. There are many issues for a tenant to be alive to but with careful planning and early advice, a tenant will stand the best chance of seeking to take advantage of the right to break the lease. For a summary of other issues to take note of, you will find a note on Top Tips for Retail Tenants at www.mundays.co.uk/ publications
The contents of this article are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication. Š Mundays LLP 2016.
theChamber 17