The break clause, a relatively rare item ten or so years ago, is now becoming even more significant in these troubled economic times, with many tenants looking to get out of their leases as a way of cutting costs.
Faced with an uncertain lettings market, and the distinct possibility that the property may stand empty for a while (and in due course start to incur liability for business rates) Landlords will hardly be overjoyed to receive a break notice.
They will therefore be looking for any possible opportunity to assert that the tenant has not properly exercised the break, particularly if the right to break was exercisable only at a precise date, because if the break is in fact found to be invalid, then the lease will continue to the end of the term. This could obviously make a significant difference to a tenant’s rental liability and impact severely on its future business plan, so great care should be taken to ensure that no mistakes are made when exercising the break.
If you are a tenant, then you should adopt the following checklist:
1. Has your break notice been properly drafted and correctly addressed?
It is unusual for a lease to specify a precise form for the notice, and usually all the tenant must do is give written notice to break on the relevant break date.
Break clauses can vary as to when they may be exercised – at any time (rare), at any time after a particular date or event (often called a rolling break), or on a fixed date.
Fixed date breaks hold the most danger for tenants as there may well be no second bite at the cherry by serving another notice, if the validity of the original notice is challenged.
Care should obviously be taken to ensure that the correct date is inserted into the notice. The notice must be given by the entity that is entitled to the break, ie the tenant, so care should be taken in group company situations where the company occupying is not the same company identified as the tenant in the lease.
2. Has it been properly served?
Service by or on the wrong party may invalidate the break. It is prudent to check the Landlord’s Land Registry title so as to be certain of the correct identity of the Landlord, particularly where the Landlord is part of a group of companies, and ensure that the registered office is checked at Companies House on the day that the notice is sent.
The notice should be served in accordance with the lease terms. If the break clause itself makes no reference to service, then the general provisions in the lease for service of notices will apply. Ensure that sufficient allowance is given for service to take effect. Break clauses often provide for not less than 6 months’ notice to be given, but the time taken for service to take effect needs to be factored in as well. This is obviously more of an issue if the decision to break is left until almost the last minute. Keep evidence of compliance with service requirements.
3. Have all the pre-conditions been complied with?
The break clause will usually require that the tenant comply with certain conditions. It is common that all rent be paid up to date (which may also include insurance, service charge and other payments if these are defined as rent in the lease), and that vacant possession of the premises be given by the break date.
Much less common in very recent leases, as a result of changes implemented by the Lease Code 2007 (which is still only voluntary), but still present in older leases, is the much more dangerous condition that all the lease covenants have been complied with.
It is advisable to appoint a surveyor if there is such a condition attached to the break. All breaches of repairing covenants will have to be remedied before the break date, so this will usually mean that the tenant will need to move out in good time so that works can be carried out.
Do not expect any co-operation on the part of the Landlord either; it is under no obligation to point out breaches that could affect the validity of the break. It is advisable to request advance confirmation from the Landlord that all rent(s) have been paid up to the break date.
Even if the break is not dependant on compliance with the repairing covenants, a tenant should take care not to leave items in the Property which could compromise its ability to yield up the property at the break.
A Lease will normally require the tenant to yield up the property at the end of the lease, however the lease may end. If the tenant has made significant alterations to the property which could prevent the Landlord from physically or legally occupying it, then these may well need to be rectified before the break date so as to ensure that the Landlord cannot take this point. All the tenant’s items, for example furniture, must be removed.
The decided cases in this area have shown that a tenant must exercise extreme caution in order to ensure that they can get out of their lease early. It is strongly recommended that a solicitor is instructed, and in many cases, a surveyor as well, to ensure that any nasty traps are avoided, leaving the tenant free to walk away.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.