Commercial Property – understanding break clauses
In these uncertain times a lot of landlords and tenants are now digging out that lease they signed. A lot of our clients are currently asking a number of questions regarding their leasehold arrangements – in particular, investigating options to terminate a lease or prevent a tenant from terminating a lease.
One of the ways to terminate your lease is by exercising a break right (assuming you have one in your lease).
There are several considerations when exercising a break clause in a lease. The wording in a break clause is strictly construed by the Courts and there are a number of incidences where at first glance you would assume that a break notice has been validly served only to find it hasn’t or where those innocent looking preconditions have not been met thus defeating the break.
When looking to serve a break notice it is always prudent to speak to a specialist commercial property solicitor first to guide you through this minefield.
Some of the matters to consider are:
- Serving the notice at the right time, in the correct format and on the correct party. This may sound obvious, but we see too many instances where tenants have incorrectly served their break notice on the landlord’s agent, or indeed the incorrect landlord. A careful check of the lease and the landlord’s superior title needs to take place to ensure that you have the correct information and the correct party. This involves a check at companies house to ensure that the information is in fact up to date and also checking if the superior property interest has changed hands
- Serving the notice in the correct format and/or in the correct manner. Some commercial leases have a set form of break notice attached, but most don’t. Commercial leases will set out detailed service provisions. It is not advisable to merely send your landlord a quick email for example since, if the notice needs to be given in a certain way and it isn’t then it is possible that the landlord could argue that notice was not correctly served and therefore the notice and break is invalid.
- Most Break Clauses have a number of preconditions; namely that if certain things have not happened then the break notice will be invalid on the break date.
Common preconditions are:
- All rents reserved by the lease need to be paid up until the break date. What is reserved as rent can be problematic for example, late interest that was due on previous overdue rent had not been paid and thus the precondition that all rents have been paid was not met. When is the rent due and how? What rents do you need to pay?
- A further common precondition is that the tenant provides vacant possession and/or perhaps provides that it is not in occupation and all occupiers have vacated the property at the break date. The question of occupation is often a tricky one and occupation is based on fact. It can include where a tenant has stored its goods at the premises or is perhaps at the property carrying out redecoration. What about the reinstatement of alterations?
- The last precondition which is usually found in a commercial lease is one which is at times the most difficult to adhere to, and that is the tenant has complied and/or materially complied with its covenants in the terms of the lease. It is arguable that a tenant is never going to be able to satisfy this ground – a repairing obligation is an ongoing one. The words “materially comply” would provide some assistance here but still care needs to be taken.