Don’t let break clauses fracture your business


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For further information, please contact Gideon Dabby-Joory, Partner, Fladgate LLP (gdabby-joory@fladgate.com)


 

Tenant only break options are a useful way for tenants to give themselves a potential way out of a lease if, for example, there may be a strategic requirement to exit a lease. On the surface, break options seem simple but there are complications within them of which tenants need to be aware. At the heads of terms stage, the break date and the number of months’ notice are usually agreed but further details are not usually provided. Tenants need to be aware of the pitfalls surrounding the contents of break clauses. This article sets out key points which should be considered.

Break notices

Landlords tent to want six months’ prior written notice for break options. Break notices must be served validly, within the relevant time limits, on the right party and at the correct address. Often there are conditions which must also be satisfied. If the notice is served incorrectly or the conditions have not been complied with then the break option does not take effect. It is strongly advised that tenants ask lawyers to serve break notices on their behalf, because the financial implications of invalid service of a break notice can be severe.

Break conditions

It is unlikely that a landlord would accept a break option without any break conditions. Standard break conditions are that all sums payable under the lease, whether demanded or not, are paid in advance of the break date. Tenants should limit those payments to the principal rent and service charge only and should insist that the service charge is demanded at least two weeks prior to the break date. Some landlords look for such sums to be paid prior to service of the break notice. Given that break notices often need to be served six months prior to the break date, this would have a significant impact on a tenant’s cash flow and such provisions should be resisted. Another frequently seen condition is that all tenant covenants in the lease have to be complied with before the break date. In reality, this is impossible to perform and such a condition should be resisted.

Landlords also prefer tenants to deliver up the premises with vacant possession. Vacant possession has a strict meaning, and if any fixtures or fittings remain in the premises after the break date this would not amount to vacant possession. The condition should be that the tenant delivers up the premises free from any rights of occupation, which means that any tenants or occupiers must have left the premises; but if fixtures or fittings remain in the premises, it would not invalidate the break option. Occasionally a break premium is required but this needs to be negotiated in the heads of terms, and it depends on the bargaining position of the parties on whether it is needed.

Refund of sums paid in advance

Most leases require principal rent, insurance rent and service charge to be paid quarterly in advance. If there is no express clause dealing with a refund of such sums then if the break date is towards the start of a quarter and the tenant has paid such sums in advance, then (while this sounds inequitable) the tenant would not be entitled to any refund, even for the apportioned amounts attributable to the period after the break date. Tenants should insist on an obligation in the break clause for the landlord to repay to the tenant any rents and any other sums paid by the tenant in advance that relate to a period after the break date. There should be a time limit on when the landlord should repay these sums; ten working days after the break date is usually sufficient.

Time Critical

It is usual that time is of the essence in break options. Tenants must diarise break dates and the day on which break notices should be served. Missing the date for service or giving the incorrect termination date (so the notice period is the incorrect length) can invalidate a break notice.

Conclusion

For a break option to be correctly exercised the conditions must be complied with and the notice must be validly served. If not, a tenant could be bound by lease obligations which it no longer wishes to observe and perform. The effects of getting it wrong are potentially far-reaching.

If you are an occupier of property through leases or advise such occupiers and you have any questions concerning break clauses, please do not hesitate to contact Fladgate’s property litigation team.

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