A break clause in a commercial lease allows a tenant (and in limited circumstances a landlord) to bring the lease to an early end. Often these clauses are mistakenly seen as a limitation on long term liability and effectively a ‘get out of jail’ card. The reality is the break clause may not be worth the paper it’s written on.
If a tenant is taking on a new lease or buying an existing lease they should have the break clause vetted so they appreciate the possible traps, some of which are listed below.
- Notice and timing
If the lease says the tenant must give a set period of notice (often months) in writing before the break date then they must do that. If they are one day late the break cannot be exercised. If the tenant is planning on exercising the break they need to be thinking about in good time before service of the notice and then arranging the notice to be served, ideally at least a month before the cut-off date. There may be difficulties physically serving the notice and the tenant will want to have a safety margin to allow for this.
- Serve it properly
The lease will specify how notices should be served and that procedure must be strictly followed. This means serving the right landlord at the right address. The tenant may be a victim of the Land Registry registration gap if the landlord has recently changed and the Land Registry has not yet updated the register. In that case notice should be served both on the old landlord (who remains the legal owner according to the Land Registry) and the new owner as well. If the tenant serves the wrong person or doesn’t send the notice to the right place then notice will not have been served.
- Pre Conditions
There will usually be additional pre conditions to exercising the break beyond giving written notice to the landlord and again these should be followed to the letter. Typically these will include the payment of rent and giving the property back free of third party rights or occupation. ‘Vacant possession’ is a particularly toxic requirement and often very difficult to achieve. Also ‘compliance with the tenants lease covenants’ is impossible to achieve as there will always be some technical breaches.
- Payment of Rent
The pre condition of paying the rent deserves special mention. First, what is the definition of rent in the break clause? Is it simply the annual rent or does it include service charge and insurance rent? These may not be known at the time the break is exercised or even by the break date. The tenant cannot pay what they don’t know about, but this still hasn’t satisfied the pre condition and therefore the break will not have been exercised.
Secondly, a tenant is expected to pay ‘all the rent due’ and that may include the rent beyond the break date. If, for example, a break date falls a few days after a quarterly rent payment date the tenant should pay the full quarters rent not just the rent up to the break date otherwise they have not paid all the rent due and the break will not have been exercised. A well drafted break clause (from the tenant’s perspective) should provide for the return of any overpayments beyond the break date.
- Interplay with rent review
Break dates in leases are often tied in with rent reviews. A ten year lease may have both rent review and tenant break after five years.
There are two issues here. First, the break date should not be the same day as the rent review – it should be one day before. Otherwise an unscrupulous landlord might argue the rent due has not been paid because no one knows what the rent would be under the review.
Secondly, one of the reasons for having breaks at around the same time as rent review is to give the tenant the opportunity to get out of the lease if market rents rise beyond their means. Ideally, a tenant should get the discussions going with the landlord on rent review well before they need to think about exercising the break clause so as to have a good idea what the new rent is likely to be so there is enough time to serve the break notice if needed.
- Landlords breaks
Let’s not forget landlords – they may have break clauses in the lease too. Again these have to be served properly on the right tenant at the right place and in good time. Also if the lease is inside the protection of the Landlord and Tenant Act 1954 the landlord’s break is only a contractual right. The landlord must still follow the statutory procedure, serving the 1954 Act notice which establishes the statutory ground for possession before recovering the property. They may also have to pay the tenant statutory compensation.
To discuss this, or any other related matter with John directly, please call us, email info@hartbrown.co.uk or start a live chat today.
*This is not legal advice; it is intended to provide information of general interest about current legal issues.