Author: Alison Mould
This article is taken from the latest edition of Fladgate’s Fashion Update. Please email the marketing team on email@example.com to be added to the mailing list for future updates.
Properly activating a break clause in a lease is a hugely important exercise for any business. Break clauses may seem easy to operate, but they can be full of hidden traps which, if missed by the unwary, may lead to the lease not, in fact, being broken, thereby leaving the tenant liable for the rent due during the remainder of the full term. It is not difficult to see how this could give rise to substantial financial exposure, particularly in the sort of high rent neighbourhoods where luxury fashion retailers tend to be found.
A lease will normally state how notice should be served on the landlord and, often, where such notice should be served. It is advisable to check with the Land Registry so as to ensure that the correct landlord is identified. Likewise, it is vital to serve the notice in the correct tenant’s name. It is prudent to add a couple of weeks to whatever period of notice needs to be given. Tenants will also need to be careful about the method of service: they will want to be able to prove that notice has been served and received. Since first class post can come back undelivered some months later, personal service – in other words, a document delivered by a known individual who can ultimately give evidence as to its delivery – is often best. Again, however, check what the lease says!
Many break clauses oblige the tenant to comply with various preconditions in order for the break to be effective. Compliance with some preconditions is not always straightforward. In particular, one condition that often catches tenants out is that all rent is paid up to date. If a lease provides for a break date that is mid-quarter, then it may still be necessary to pay the whole of that quarter’s rent, regardless as to whether or not a rent demand is received for the whole of the quarter’s rent or for an apportioned part of the quarter. It may be possible for a tenant to recover any excess rent that relates to the period following the break date, but that will depend on the terms of the lease.
One of the other popular preconditions is that the tenant must deliver up vacant possession by the break date. What this actually means will depend on the terms of the lease, but it may require the removal of all of the tenant’s fixtures and fittings, including, where appropriate, suspended ceilings. Clearly, therefore, a retail tenant will need to ensure that it starts to undertake these works well in advance of the break date. When vacating a property, a tenant should also ensure that it removes everything from the premises, including bags of rubbish, old clothes rails, etc. The aim is to leave the landlord with no opportunity to argue that the lease has not in fact been broken.
One final key precondition of a break clause to note is compliance with the tenant’s repairing obligation. It is arguable that absolute compliance with such a covenant is impossible, as some part of any premises is always likely to be in a greater or lesser state of disrepair. Break clauses tend, therefore, to use words like “material” compliance with the repairing obligation.
As ever, with important contractual terms, the best advice is to seek professional surveying or legal advice to ensure that these pitfalls are avoided, not encountered by, you.
Alison Mould, Partner, Fladgate LLP (firstname.lastname@example.org)