Break Clauses: What are they, and what you need to look out for.

 

Break clauses are common within leases and can be useful where the parties need flexibility on the length of the term.  However, they can also be dangerous because they are construed so strictly by the Courts.  This means that, as a tenant, if you are issuing a break notice, you need to be very careful to make sure that you have complied with its terms.  Some of the more ridiculous situations in which a tenant has not managed to exercise its break are:

A tenant had decorated using 2 coats of paint and 3 were required under the lease. (Osbourne Assets v Britannia Life (1997))

A rent cheque was put in the post but not received until after the break date. (Commercial Union v Label Ink (2001))

A tenant had paid rent late a couple of times over the previous 6 years of its lease and so interest had accrued but not been demanded by the landlord.  The tenant did not pay the interest due (which was £130). Avocet Industrial Estates LLP V Merol Ltd and another company (2011))

A tenant had retained keys after the break date to allow contractors access to finish dilapidations works. (Mourant Property Trust Ltd v Fusion Electronics Ltd (2009))

The terms of the break required notice to be served on the landlord’s management company but notice was served on the landlord. (Hotgroup plc v Royal Bank of Scotland (2010))

We can help to draft a break clause which will make life easier when you want to terminate the lease.  For example, the monies due to be paid in order to exercise the break should be limited to the annual rent only.  This would cover the position in point 3 above where interest was due and unpaid.  In addition, there is often an obligation to provide “vacant possession” on the break date.  This expression is very strictly construed and can be breached by the tenant leaving some of its possessions in the property (e.g. internal demountable partitioning).  Better wording should be agreed so that the tenant simply needs to ensure that there are no people in the property.  Lastly, landlords often include wording so that a break notice will be ineffective if there is a subsisting breach of the lease.  This will be almost impossible for the tenant to comply with as, from day to day, there will be some minor element of disrepair at the property (e.g. chipped paint on a skirting board).  Landlords often agree to delete this pre-condition on the basis that they will still have the right to sue for breach of the lease after the break has been operated.

Also be aware that if rents are paid in advance, which is the case in practically all leases, you won’t be able to obtain a refund unless the lease expressly provides for this.  M&S lost out on a whopping £1,147,696.25 in rents paid in advance when it lost its case on this point but landlords don’t seem to be challenging tenants’ requests for a refund and so there is no reason for tenants to find themselves in the same position as M&S if they are well advised.

A final point to consider for tenants is that you will pay SDLT on the whole duration of the term notwithstanding the presence of a break clause.  It is possible that it may therefore be cheaper in tax terms to have a shorter initial term and then renew this.

From a landlord’s point of view, bear in mind that sometimes a tenant would be willing to remain in the premises if the terms of the letting are tweaked slightly.  If you receive a break notice it is always worth keeping lines of communication open if you would like the tenant to stay.  A break notice can’t be withdrawn once served, but if one of the pre-conditions if the break isn’t satisfied (e.g. the tenant remains in the property) then the break notice will be invalidated, and the lease will continue.  This would allow you to amend the terms with a deed of variation rather than having to go to the cost of entering into a new lease.

You can see from the examples above that break clauses are one of the most contentious areas of leases but if they are navigated sensibly then they can afford both landlords and tenants the flexibility and security they are looking for within a leasehold arrangement.

If you would like to discuss any element of this article with a member of our team then please contact us on 01883 708155

Charlotte Taylor
Commercial Property Solicitor
charlotte@baldwinandrobinson.co.uk