Associate solicitor Gemma Smith, in our Commercial Property team, explains what a tenants needs to do to when exercising a break cause in relation to a leasehold property.
A break in a lease is often negotiated by a tenant to give them reassurance that they can end the lease early should the need arise; for instance because they need larger (or smaller) premises.
This important right can be lost if the tenant does not comply with all of the requirements of the break clause resulting in the tenant being tied to the lease until the next break date or the end of the term; potentially a very costly mistake.
Traditionally break notices had to be served precisely in accordance with the lease for them to be valid; even down to the colour of the paper the lease on which the notice is required to be served. The case of Mannai v Eagle Star Life Assurance saw a departure from this very strict approach and it was held that break notices are not necessarily invalidated by a mistake. For tenants this was a light at the end of the tunnel. However, the cases following Mannai have reverted to the more traditional, strict, approach.
Required conditions
It is not just the form of break notice and whether it is served correctly (in time and on the correct party) which can frustrate a break. Most leases contain conditions which must be fully complied with at the break date in order for the break to take effect and careful attention should be paid to these to ensure compliance. These requirements may include:
- Vacant possession – this is a commonly used phrase but its meaning is wider ranging than many people would think. This means not only should the property be left free of occupation of the tenant and any sub-tenants but also free from chattels, tenant fixtures and even rubbish. Some leases worded more in the tenants favour may only require the property to be free from possession of the tenant and any sub-tenants and this is now viewed as the fairer approach.
- Rent – leases often require all rents due under the lease to be fully paid at the break date. If rent is paid quarterly, this will mean that the entire quarter’s rent must have been paid (even if the break falls just after a quarter day) even if there is a clause whereby the landlord must reimburse the overpaid rent after the break. Also be aware that ‘rents’ can include a number of items such as insurance rent, service charge and interest. If a break is conditional on payment of rent, it is better for this to be limited to the annual rent.
- Compliance with covenants – sometimes leases go even further than requiring the rent to be paid and require the tenant to have fully complied with all of its covenants set out in the lease. Compliance with all covenants under the lease is extremely wide and it could result in the break failing due to a minor breach. For example, if the lease is a full repairing lease, any want of repair at the break date will give the landlord grounds to refuse the break. Tenants should resist this requirement if at all possible. Sometimes wording is used so that only a ‘substantive’ breach will frustrate the break, but even this is risky for a tenant and it may result in an argument over what is substantive!
If possible, tenants should resist conditions with which it may be difficult or impossible to comply. Though this and the points above will all depend on what can be negotiated and what the landlord is prepared to agree. A tenant who wants to exercise a right to break should seek legal advice well in advance of when the notice needs to be served. We serve break notices on behalf of clients as well as advise on the terms of the break as set out in the lease so they have a clear understanding of what is required to successfully break the lease.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
