A recent High Court decision serves as a useful reminder for commercial landlords and tenants of the need to comply with the applicable conditions for exercising a break clause pursuant to a lease. As the below case demonstrates, break clause are strictly construed by the courts and the failure to comply will mean that the break clause has not been validly exercised, therefore leading to the continuation of the lease.
In Riverside Park Ltd v NHS Property Services Ltd (2016), the tenant under a lease carried out various works to an open-plan leasehold property, which included the installation of partition walls. When the tenant attempted to exercise its right to break under the lease, but then failed to remove those partitions, the High court ruled that the tenant had failed in its duty to provide vacant possession to the landlord. As the partitions were chattels and of benefit to the tenant rather than of benefit to the landlord, the landlord’s right of possession was fettered and the lease continued.
What is a Break Clause?
A break clause may be included in a fixed-term lease and allows either the landlord or the tenant (or both) to terminate the lease early, typically either (i) on one or more specified dates or (ii) at any time during the term of the lease. As the above case demonstrates, such a break clause will only usually be exercisable if specified conditions are met – and common examples include all payments having been paid in full by the tenant (often including interest for late payments) and the tenant providing vacant possession of the leasehold property. It is usual for the lease to specify the terms of a formal notice which must be served on the other party to validly exercise a break clause, and the timescales in which this must be done.
Exercising a Break Clause
As the exercise of a break clause can be complicated, depending on the terms of the lease and/or any ancillary documents entered into under the lease arrangement, it is safest to seek expert legal advice to ensure that all conditions are met. As a minimum standard, whether you are the landlord or the tenant, the following list of practical issues should be considered carefully before exercising a break clause. Always bear in mind that the price of failing to properly exercise a break clause is likely to be far more significant than any the price of any measure outlined below:
- Once a notice has been served of a party’s intention to exercise a break clause, it cannot be withdrawn without the consent of the other party (if each party agrees to waive the notice, a new lease is granted).
- Notice must be served in good time and in strict adherence with the lease – tenants are advised to keep evidence of their compliance with the terms of the lease and ensure that the landlord has received the notice (keeping evidence of the method posting or requesting an acknowledgment of receipt), whilst the landlord may not have to accept the notice if issued late, incorrectly or not received.
- All outstanding sums due under the lease, including any default interest due on past arrears, should be paid for the break clause to be effective – if the tenant is unaware of any sums owing this should be confirmed with the landlord. Any amounts in dispute should be paid by the tenant to the landlord on a without prejudice basis and the tenant should carry out their own interest calculations in accordance with the terms of the lease. All payments must be made in cleared funds unless the landlord has expressly agreed to accept payment by cheque.
- Vacant possession will very often be a requirement of the break clause under the lease, the tenant must ensure that the leasehold premises are vacated.
- General obligations that apply at the end of the lease must be complied with before the end of the lease should be complied with before the break date (for example removing signage). The tenant should ask the landlord for confirmation of what is required and a schedule of dilapidations.
- If the break date falls within the middle of rental period, check whether the lease requires the landlord to refund any rent, service charge, insurance, car parking, licence fee or otherwise. As the above Supreme Court decision demonstrates, the courts will not imply such a term.
- Are there any ancillary documents to the lease which have been entered into (for example, a licence for alterations) and which might impact on the validity of the break clause?
Expert Commercial Property Advice
Whether you’re a landlord or a tenant, if you’re having trouble with a break clause, our team of Commercial Property solicitors are here for you and your business. Please contact our team today using one of the telephone numbers below.