Break Clauses – Breaking up is hard to do

General Papers and Article

This paper examines issues that have recently been highlighted in court cases in relation to break clauses in leases and flags some of the mistakes made when dealing with break clauses.

Many of the points are tenant specific, however the landlord and its consultants have to be equally on top of the process to be able to consider whether a notice has been served correctly.

Introduction

The Code of Practice for Commercial Leases (Third Edition) encourages landlords not to impose onerous conditions on tenants. The only pre-conditions (attached to any break clause) that the Code promotes should be that:-

•the principal rent is paid up to date
•occupation is given up and there are no continuing sub-leases left in place

Although these concepts are relatively easy to understand, when it comes to the fine legal detail there are all sorts of issues that come into play and we cover some of those points below.

In the shaded box we have set out a simple break clause which aims at avoiding most of the problems and which is Code compliant but it still needs to be treated carefully.

Operating a break clause & pre-conditions

Break clauses are worded in a variety of ways but the essence of a break clause is usually that the tenant:

• has to give a minimum period of notice to the landlord in order to exercise the break clause
• has to have paid (prior to the break date) all sums due and outstanding under the terms of the lease as at the break date
• has to provide vacant possession.

Some break clauses impose further conditions such as:-

• the property must be left in a good state of repair and condition in accordance with the terms of the lease
• the tenant has to have complied with the lease terms – sometimes this is qualified by reference to “in all material respects”
• a penalty has to be paid to exercise the break clause
• the original lease and other title documents relating to the property have to be handed back.

The more conditions there are, the more likely that the break clause will be difficult to operate, if not inoperable.

A break clause which states, as a pre-condition to valid exercise, that the tenant has to have complied (in all respects) with the terms of its lease as at the break date is, under current case law, inoperable and therefore not a break clause. The landlord can point to a very simple breach3 of the terms of the lease – a dent to a door, for instance, or a failure to paint the property with three coats of paint as opposed to two, if the lease specifies that the re-decoration has to be effected by the application of three coats of paint.

The courts have taken a very strict approach to the exercise of a break clause and if a very minor breach has occurred, the fact that it is minor is irrelevant where the break clause requires absolute compliance. Therefore, the practical advice must be that where you have a break clause which contains conditions, it is absolutely essential that you advise your client to ensure that the conditions are satisfied before the break date.

Note that once a break notice has been served it cannot be withdrawn unilaterally (unless the lease states otherwise). Where it is mutually agreed that a break notice can be withdrawn, that would result in there being a surrender of the existing lease (by service of the break notice) and a re-grant of a new lease (upon the agreed withdrawal).

In operating the break clause:………………

Request a full copy of the article and check list by clicking on the link below

– WHO CAN SERVE A BREAK NOTICE?
– WHAT HAPPENS IF THE FORM OF THE NOTICE DOES NOT STRICTLY COMPLY WITH THE REQUIREMENTS SET OUT IN THE LEASE?
– PAYMENT OF THE PRINCIPAL RENT
– CAN I PAY AND DISPUTE PAYMENT LATER?
– HOW DO I MAKE PAYMENT?
– WHAT IF THE BREAK CLAUSE STATES THAT ALL SUMS DUE HAVE TO BE PAID – NOT JUST THE PRINCIPAL RENT?
– WHAT IS THE EFFECT OF THE BREAK CLAUSE ON SUBTENANTS, GIVEN THAT THE CLAUSE REQUIRES MY DELIVERING UP VACANT POSSESSION?
– OK, SO I MADE A MISTAKE BUT THE LANDLORD MISLED ME, CAN I USE THAT TO VALIDATE THE BREAK CLAUSE?
– MY NOTICE WAS NOT EXACTLY AS REQUIRED BY THE LEASE BUT IT WAS STILL CLEARLY A BREAK CLAUSE?
– I HAVE GOT TO PAY THE RENT AND SHOULD BE ABLE TO DO THAT IN TIME, HOWEVER I HAVE ALSO GOT TO PROVIDE VACANT POSSESSION; WHAT DOES THAT MEAN?
– CONCLUSION
– BREAK CLAUSES CHECK LIST