Making sure you operate your break clause effectively.
Getting it right
For a landlord or a tenant, the break clause – giving one party to a lease the right to terminate the lease – is one of the most valuable and keenly negotiated elements to the lease. Therefore, to ensure that a break right is exercised correctly, it is most important that any conditions are strictly performed.
When considering whether to exercise a break right, the tenant will have different concerns and conditions to a landlord. A tenant who misses or fails to validly exercise a break right could potentially find itself liable to continue paying rent on a lease for a number of years, or having to pay a surrender premium. On the other hand, a landlord who is looking to remove a tenant may find itself having to attempt to negotiate a surrender, or delaying its plans e.g. to dispose or redevelop the property.
Either way, there are financial implications to exercising a break incorrectly. There have been a number of cases providing guidance and salutary lessons on the effect of getting it wrong.
Compliance with conditions
One of the key aspects to exercising a break right is to satisfy all the specified conditions in the relevant break clause in the lease. For a tenant these can include:
- Serving the notice. This may sound simple, but one should look closely at the wording to establish whether the break date is, for example, the actual quarter day or the day before. Equally as important is ensuring the right party serves the notice and the right party receives the notice.
- Payment of all rents due. All rents due may include insurance and service charge in addition to rent for the period beyond the break date, particularly where the break date is not a quarter day. Therefore, one may have to pay for a period when the property has already been vacated, but it must be clear whether any such overpayment can be recovered. If the rent is subject to VAT, it may not be possible to recover the overpaid tax.
- Performance of all covenants. The risk for the tenant is that breach of a covenant (e.g. decorating or repair) which on the face of it is quite trivial, may prevent the tenant from exercising the break if it is subsisting at the relevant time.
- Give vacant possession. This is quite a common condition, but not without risk. The tenant’s property (e.g. office furniture or stock) remaining at the property may result in the landlord claiming the property is not vacant. If the tenant has sublet, any sublease will also terminate on the tenant exercising a break right, but the tenant must ensure the subtenant has also vacated.
- Landlord’s conditions. If the landlord has a break right, it is unusual to have many conditions, other than to give notice. There may be a condition that the landlord must intend to redevelop the property. Satisfying this condition will depend on whether the tenant has statutory protection under Part II of the Landlord and Tenant Act 1954.
Time of the essence
It is implied that any time limits are “of the essence”, unless the break clause states to the contrary. Care should be taken to ensure that time limits are strictly adhered to. Time being of the essence means that it is a condition of the exercise of the break that those time limits are followed, failure to do so would mean that the break right has not been properly exercised. If a notice period is to be no less than six months, then giving less would mean the notice will be invalid.
The party contemplating exercising a break right should give itself plenty of time before the deadline for serving a notice. By being fully prepared, the risk of the break notice being deemed invalid can be avoided. In addition:
- Consider how to comply with any conditions and seek professional advice in good time.
- Obtain evidence of service of notice e.g. landlord’s acknowledgment or postage receipts.
- Ensure there are no arrears of any sums, even if there is a dispute over the amount.
- If appropriate, advise the landlord in advance and get confirmation of what they require.