Break clauses are commonplace in commercial leases and afford the tenant an opportunity to bring the lease to an end earlier than the last day of the full term of the lease. This can be very beneficial for a tenant as they will have the security of a longer lease but with an option to bring it to an end should any issues arise, or their circumstances change during the term. It may arise on a specific date, for example on the fifth anniversary of the lease, or be exercisable on a rolling basis at any time during the term.
A landlord may wish to attach some conditionality to the exercise of the break clause and so a tenant should take note of exactly what is required of them to successfully bring the lease to an end. The compliance by the tenant with any conditions attached to its break clause is strictly interpreted and as Lord Hoffman memorably put it in Mannai Investment Co Limited -v- Eagle Star Life Assurance Co Limited (1997) AC749, “if the [break] clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.”
The most common conditions that we see in break clauses are: –
A break clause almost always includes a requirement for the tenant to provide a specific period of notice of its intention to bring the lease to an end. If the break clause requires the tenant to serve “no less than six months’ prior written notice” then they should ensure that notice is served and capable of being received by the landlord at least six months’ prior to the date upon which the lease is to end.
If the tenant fails to give the appropriate notice period, then their notice will be invalid and the right to bring the lease to an end is lost.
Whilst the landlord will have other remedies for pursuing the tenant for non-payment of rent, service charge and any other sums due under the lease, they will often make the exercise of the break clause conditional on all rents and other payments due under the lease being up to date.
The problem that commonly arises with this condition is that the date the lease will end can fall between the dates upon which the tenant is expected to pay the rent and other payments to the landlord. If, for example, the tenant pays the landlord quarterly in advance then it must ensure that the full quarter is paid to the landlord notwithstanding that rent has been paid for a period beyond the date the lease ends.
Additionally, there is no automatic right to recover rent relating to a period from the date the lease ends to the next rent payment date and so careful drafting is required to ensure the tenant can recover this money.
- Compliance with the terms of the lease
No matter how careful a tenant has been to ensure it complies with the terms of the lease, it is almost inevitable that the tenant will have committed some form of breach of covenant, perhaps a mere technical breach. The tenant may not even be aware of the breach, however it could be used by the landlord to frustrate its exercise of the break clause. Something as simple as a cracked plug socket could technically leave a tenant in breach of its repairing obligation notwithstanding the disparity in the cost of replacing a plug socket to the cost of a tenant having to pay the rent, service charge, and rates for the remainder of the term.
An absolute condition that the tenant has complied with all of the terms of the lease should be strongly resisted by the tenant when negotiating the lease, however if the landlord is unwilling to agree then at least trivial, immaterial or insignificant breaches should be excluded. Additionally, a tenant would be well advised to try and establish what breaches there may be prior to the end of the lease as this will give the tenant an opportunity to remedy them.
A requirement to give up full vacant possession on the break date requires the tenant to remove all its contents, fixtures and fittings and any waste and rubbish accumulated in the premises. If there is a sub-tenant or occupier in the premises then the tenant must ensure that they have vacated the premises and removed their contents and belongings.
A tenant would be well advised to limit their obligations to “giving up possession of the premises” as the wording “vacant possession” places a much higher standard on them.
It cannot be overstated just how important it is that a tenant understands and complies with each and every element of its break clause. The words of Lord Justice Lewison in Siemens Hearing Instruments Ltd v Friends Life Ltd [2014] should serve as a pointed reminder to tenants when exercising their break clause: –
“if you want to avoid expensive litigation, and the possible loss of a valuable right to break, you must pay close attention to all the requirements of the [break] clause… and follow them precisely.”
The cost of failing to pay close attention to the conditions of its break clause may leave a tenant liable for the rent, service charge, insurance rent and rates attributable to the premises for the remainder of the term of the lease.
Ruth Campbell is a solicitor in the Commercial Property Department at Worthingtons Solicitors, Belfast with experience in a broad range of landlord and tenant matters. Ruth can be contacted at [email protected] or on 028 9043 4015.
