A break clause in a commercial lease : How does it work?

This is a brief overview of the highly complex topic of contractual rights to break leases of commercial premises by either the landlord or the tenant. We would always recommend that you take specific legal advice on your particular case or any concerns you may have as the information set out in this article may not apply to the facts of your case.

Background – why do break clauses exist?

Tenants

Landlords are generally keen to ensure that their commercial leases are granted for contractual terms for a lengthy period, often 10 years or more, to protect their investment for as long as possible. However, this does not always suit the need for flexibility required by tenants who can sometimes be reluctant to enter into leases of this length of time and so it has become common for the parties to compromise by agreeing to a longer term but to include a break clause for the tenant to terminate the lease after say five years. This is a tenant break right.

Landlords

There are also occasions (in our experience currently these are a lot less common) where a landlord might want to maintain flexibility, for example, if it considers that it might want to redevelop the property at some point during the lease term and so here a landlord may include a break clause in a lease which is therefore called a landlord break right.

It is important here to distinguish between leases which have security of tenure under Part II of the Landlord and Tenant Act 1954 and those which have been contracted out. If a lease has security of tenure then if you as a landlord are exercising a break clause for a contracted tenancy you will also have to serve a s.25 notice on a tenant. This is another extensive topic and one for another day.

Some leases contain a mutual break clause so that either party can exercise a break right to bring the contractual term of the lease to an end in accordance with the provisions of the lease.

Exercise of the break clause

Preparing the Correct Notice

When it comes to either party wanting to invoke the break clause, it is important to read the lease carefully and that includes paying careful attention to the practicalities of serving the notice. The case law shows that the requirements will be strictly interpreted even if there seems little purpose to them. In the case of Mannai Investment Co Ltd v EagleStar Life Assurance Co Ltd [1997] AC 749 it was said by one of the appeal judge’s that “if the clause had said that the notice had to be on blue paper, it would have been no good serving notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease”.

Serving the Notice

You must ensure the notice is sent to the correct landlord/tenant’s address. We have set out a few pointers on this below:

• Notice must be addressed to and served on the tenant/landlord. If more than one, serve the notice on them separately.
• Check what the lease states on service as there may be particular requirements especially to do with accepted method of service such as first class post/in person.
• Check the latest title registers to ensure you have the correct names and addresses of the landlord/tenant. When acting for tenants we also check the last rent statement.
• Be mindful of the registration gap at the moment – currently waiting about 2 years for title registers to be updated. Notices generally need to be served on the legal owner who is registered at the Land Registry but there are circumstances where this is not the case.

Break Notice Conditions

Generally, a landlord break notice tends to be subject only to correct service of the notice. However, more often tenant break rights contain more onerous conditions to be complied with such as payment of all rents (which you will see from the example set out below has been held to include non payment of a nominal amount of interest) and full compliance with repairing obligations.

If as a tenant you are seeking to rely upon a break option then our advice would be to be very careful! In one commentary it was said that “recent case law provides more banana skins for tenants to slip up on”.

We would advise you to read your lease carefully. We would also advise you to draft the clause carefully in the first place to avoid pitfalls when it comes to the time when you actually want to invoke the break because at that point it will be too late. Of course, this is something that our Commercial Property department can help you with.

Break clauses in leases are very strictly adhered to and are often drafted with conditions that if not complied with can allow the landlord to frustrate the break option which can be a very expensive mistake to make if it means you are committed to further years under the lease.

As a minimum a break option will generally be conditional upon up to date payment by the tenant of rent and any VAT payable on the rent and the tenant vacating the property. When acting for a tenant if we are going to accept any conditions (and it is highly unusual that there would be no conditions) we would really only want to see these two. This is because there have been so many cases where the tenant has been frustrated from exercising its break option because the landlord has sought to interpret the conditions strictly as demonstrated by the following examples:

• In Avocet Industrial Estates LLP v Merol and another [2011] a break clause required payment of all sums due under the lease (rather than as mentioned above main rent VAT) and it was held that this included default interest on previous payments even though the landlord had not demanded payment so even though the payments in question were nominal (£130) the break was held to be not validly exercised.
• If vacant possession is required as a condition of a break then again you must be very careful because in a 2016 case involving NHS Property Services Limited (Riverside Park Ltd v NHP Property Services Ltd), among many other similar cases, it was found that a tenant had not been able to exercise its break option because it had left behind some partitioning even though it was demountable. There have been many other cases where failure to reinstate works has prevented tenants exercising their break options so again, check the lease and check any licences for alterations.
• Another potential pitfall in the exercise of break options and something to think about is ensuring that the landlord repays any rent paid in advance beyond the break date. In the famous M & S v BNP Paribas case (Marks and Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015]), the Appeal Court held that it was not appropriate to imply a term into the lease requiring the landlord to repay rent and other monies paid in advance. So you will always need to ensure there is a clause requiring repayment of advance sums beyond the break date.
• Our final point on this is on timing. Again, provisions are very strictly adhered to. If the lease requires a specific notice period to be served then even if notice is received by the landlord a day late the landlord could refuse to accept the break option. We would highly recommend diarising the relevant dates and considering the matter – including seeking legal advice – well in advance.

You may also be interested in reading a previous blog we wrote on surrendering commercial leases.

Our Property Litigation team regularly serve break notices under a break clause and have strict procedures in place to ensure that pitfalls are avoided. For a competitive fee it is worth paying compared to the financial consequences of getting it wrong.

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