Rebecca Watkins clarifies the legal jargon surrounding the break clause in commercial property leasing contracts and how to use it safely.
The need for business premises rarely stays static. In a growth phase, a larger site could be necessary but when times are tougher it maybe that smaller premises are on the cards.
Making the move at the end of a lease means the process is simpler, but when a firm wants to move mid-lease they need to exercise caution and carefully use the leaseholders ‘break right’.
The requirements and obligations on tenants when exercising break rights are notorious in how they must be strictly complied with, and following recent case law it has become clear that no leeway will be given to a leaseholder in such circumstances by the landlord.
Firstly, it is important to remember to comply with all terms of a break clause that are held within the lease. As mentioned, the terms of the break clause will be strictly interpreted. If a clause states that the break notice must be served on pink paper, then only that will do.
Next, leaseholders should check who has the right to terminate the lease. If the business is not the original tenant to the lease, then it should check that it actually has the right to terminate the lease. It may be that the right was only granted to a named tenant.
Clearly, the break notice should be addressed to the right party and it is important that every party eligible to receive a copy of the notice does. If the landlord comprises of two or more individuals or entities, the notice should be addressed to all parties and sent to the correct address. However, recent case law has confirmed that it may be sufficient to serve a break notice on the landlord’s agent, so it follows that it is worthwhile sending a copy of the notice to the landlord’s agent as well in order to cover all eventualities.
A matter of timing
Timing is key to success. While a leaseholder may be lucky to have a break clause that specifies the actual break date, many refer to an anniversary of a date relating to the lease, for example the term commencement date. If there is any possibility that the break clause could be interpreted in a different way to the business’s interpretation, then more than one notice may need to be served to ensure a successful termination of the lease.
Leases may come with pre-conditions before a break clause can be exercised, in other words, the tenant will have to comply with certain obligations before the lease can be terminated. The most common of which are:
Payment of rent
It might sound obvious, but leaseholders should check what is meant by “rent”. It may not only be the annual rent but other sums such as service charge, insurance, VAT, interest or any other amount that might be considered as rent and due to the landlord under the terms of the lease. If in doubt, the landlord should be consulted in order to avoid receiving an invoice at the last moment so making the break ineffective. Again, be sure on timing. When should the payment be made? Should it be at the time of service of the notice or at the break date?
If in doubt, do both. Finally, in respect of payment of rent, if the break payment date falls between two rent payment dates, unless stated otherwise, the full rent installment including for the period falling after the break payment date will be due. There must be no ‘apportionment’, which is a legal term meaning the part charge from the date of the break to the end of the rent period.
It’s worth noting that there will be no obligation on the landlord to repay unless the lease contains an obligation on the landlord to refund any overpayment for the period falling after the break payment date.
Again it is important to ensure that not only has the business moved out of the premises but also that all fixtures, fittings and goods together with any subtenants and any workmen are no longer present. It is also advisable to hand back any keys prior to the break date.
This is a very onerous condition that is thankfully becoming less common in break clauses as it is difficult to comply with. In simple terms, material compliance means that any obligation in a lease must be complied with else the served break notice may not be effective.
Prior to the case, even the most trivial breach could leave this type of condition unworkable. Even so, leaseholders should do their best to comply with every term in a lease.
If a penalty payment is due, the leaseholder should ensure that it is paid to the right party at the correct time. It should be noted that while it is sensible to seek the landlord’s acknowledgement and confirmation on such things as outstanding sums and works required in order to materially comply with the terms of the lease, there is no obligation on a landlord to respond.
Check through records for any outstanding payments and any interest that may have accrued and all work that is believed to be necessary should be carried out.
Lastly, the leaseholder should ensure that it has served the notice correctly. It’s critical to make sure that the break notice is served not only in accordance with the terms of the break clause but also in the way mentioned in the lease.