Can I catch a break?
As both the costs arising from the energy crisis and the uncertainty surrounding the UK’s economic future increase apace many commercial tenants will be looking to rationalise their property portfolios. This will entail identifying outlets which are unprofitable, or otherwise surplus to requirements, and either “mothballing” them or, where possible, terminating the leasehold interest early. By the same token, landlords will be desperate to protect their income stream. This may result in landlords challenging the validity of break notices given by their tenants. Unless tenants can ensure that they have ticked all the boxes, litigation may well be inevitable. So, what are the traps for the unwary?
Timing
Commonly, break options will specify a particular date on which a tenant’s break option can be exercised, and a certain period prior to that date when notice must be served. The tenant has a single opportunity to bring the lease to an end. Effecting service of a valid notice might prove logistically challenging if the break option requires a specific period of notice (rather than a minimum period) and/or when the date by which notice must be given is fast approaching.
Leases which provide that a break notice may be served at any time during the contractual term or, more commonly, at any time after a particular date, are easier to bring to an end – a replacement notice may be served in place of any identified as defective.
Form of notice
Almost all leases prescribe that a tenant’s break notice must be in writing, and an email will not usually suffice.
A lease might append a form of notice, in which case it is strongly advisable to adopt that form verbatim. Otherwise, if a lease sets out the requirements for appropriate notice, then a tenant must ensure that each and every one is incorporated. If the lease says that notice has to be given on blue paper, it is no good serving a notice on pink paper, because “the key does not fit the lock, and so the door will not open” (Lord Goff of Chieveley in Mannai Investment Company Limited -v- Eagle Star Assurance [1997]).
Effective service
Making sure that the break notice hits its mark, and the date when it hits its mark, are also vitally important. The identity of the current landlord should be ascertained from HM Land Registry, and confirmed by the most recent rent demand. The address for service will be specified in the lease, and may be confirmed or updated by the searches at HM Land Registry and Companies House.
Limited methods of service might be prescribed, either in the break option itself or in the lease’s general service provisions, as might the date on which service is then deemed effected. Again, therefore, it is essential to check the lease provisions carefully, and to get the timing spot on.
Break conditions
A break option will frequently stipulate conditions with which the tenant must comply as at the date of service of the break notice, or at its expiry. As the tenant’s right to break the lease is regarded as a privilege, any and all conditions must be strictly complied with.
In more modern lease, conditions might include payment of a premium either on the date of service of notice, or on or before the termination of the lease.
Payment of rent
A common condition is that, as at expiry, the tenant has paid “Rent and all other sums due under this Lease up to and including the Break Date”. The definition of “rent” varies, so the lease should be cautiously checked. The phrase “up to and including the Break Date” might, to the uninitiated, indicate that the tenant may apportion “rent” up to the break date. If that break date falls part way through a rental period, then the tenant is likely to be required to have tendered the full “rent” payment even though part of it will cover a period post the break date (PCE Investors L:imited -v- Cancer Research UK [2012]). In this case the tenant tendered an apportioned rent of £8,563.01 rather than a full quarter’s rent of £55,812.50. It was held to have invalidated its break notice, and was liable for further rent of £712,500 for the remainder of the contractual term. A more modern form of lease will provide for the landlord to reimburse those apportionments within a limited time following the termination. If it does not, the additional rent, service charges etc are lost.
If, as above, the lease requires the payment of “all other sums” due under the lease, then it is advisable to check back through the tenant’s payment history to pinpoint whether any were made late and, if so, whether the landlord was entitled to, and paid, interest. In Avocet Industrial Estates LLP -v- Merol Ltd & Tudor Rose International Ltd [2011] the tenant had, some time previously, failed to tender interest on a late payment(s). Even though the landlord had not demanded interest, the High Court held that the tenant could easily have calculated that interest itself, and the failure to pay it invalidated the break notice. The failure to pay interest of £130 meant that the tenant remained liable for rent for the reminder of the contractual term, amounting to £337,500. Ouch…
Vacant possession
Again a modern requirement is that the tenant delivers up vacant possession of the demised premises on the break date. There has been a great deal of case law regarding the meaning of “vacant possession”. In NYK Logistics (UK) Limited -v- Ibrend Estates BV [2011], a tenant failed to meet this condition where its contractors were finalising repairs a few days after the break date, even though the parties’ respective surveyors had agreed that access could be maintained. The courts’ view is that the tenant must return the premises to the landlord free of people, chattels, and interests; i.e. with nobody physically in the premises, with any demountable partitioning, furniture etc removed, and with no subsisting third party rights. The landlord must be able to take immediate exclusive possession, occupation and control of the premises, so that they can be relet without hindrance or delay.
It is more common for modern break clauses to refer the tenant handing back the premises “free of occupation”, which avoids some of the more extreme aspects of compliance with a requirement for vacant possession.
Compliance with other tenant covenants
In the event (although rarer nowadays) that a condition of the break option is that the tenant has complied with all of its covenants under the lease, then satisfaction of that condition becomes even more fraught with danger. The premises will need to be handed back in repair, reinstated, and redecorated. A review may also need to be undertaken to ensure that the tenant has complied with its covenants throughout the term of the lease.
Conclusion
If your lease has but one opportunity for you to determine it and/or prescribes anything but the simplest of conditions, then the prudent approach must be to assume that, in the current economic climate, the validity of its exercise is likely to be challenged. If you leave yourself plenty of time to seek expert legal advice – both on service of the break notice, and in ensuring compliance with any break conditions – then you can catch a break.
