Tenant's Break Clauses (them's the breaks)
At Greenwoods Legal LLP, we are now seeing a real uptick in the number of lettings where we are acting for tenants (particularly in the retail and hospitality sector) and the majority of these now include the safety net of a break clause in case their business strategy does not go quite to plan at a property.
It is important to note that exercising a break clause is not a straightforward process. A tenant must satisfy various grounds for a break to be validly exercised:
1. Drafting and Serving the break notice correctly
Unless a break notice has been drafted and served correctly then it could be fatal to a tenant’s chances of breaking their lease, meaning that the lease and the tenant’s covenants (e.g. paying rent, keeping the property in good repair and condition etc) will continue until the next break opportunity or until the end of the lease.
The lease will (or should) set out how the tenant’s break notice should be served, when it should be served by and where it should be served. Any notices not strictly adhering to the conditions prescribed under the lease (for example, if the lease states that notices are only validly served by the tenant to the landlord if they are hand delivered to the landlord’s registered office but the notice is only sent by first class post) then this will most likely be seen as an invalid notice by a judge, and may even lead to a costs order being made against you if this were to be litigated in court.
As more and more foreign companies buy commercial property in England and Wales, tenants should ensure that the landlord gives an address in the UK for notices to be served. Otherwise, you may find yourself having to serve the notice abroad which may include instructing process servers, which can be an expensive process, and ending up in litigation as to whether the notice has been served properly or on time.
2. Complying with the conditions of the break clause
It is also very common for landlords to also set conditions in relation to any tenant trying to exercise their break clause under the lease. The most common of which are:
• The break notice must be served within a specified period or by a particular date or use particular wording. Extreme care must be taken because if you miss the date even by one day, or the prescribed wording is wrong, then the notice could be invalid.
• The annual rent (and all other payments due under the lease) are paid up-to-date by the break date – modifications should be sought to this clause by a tenant’s solicitor so that it is limited to all payments that the landlord has made the tenant aware of in writing by a reasonable date (depending on how much notice needs to be given by the tenant) prior to the break date are paid. This avoids a situation where a landlord argues that a break clause has not been strictly followed and the lease continues as a tenant has not paid e.g. a small amount of interest owed under the lease (which the tenant was not aware that they had to pay);
• The tenant has complied with all of its covenants under the lease – this should be resisted as much as possible by a tenant. A break clause is a hugely commercial sensitive clause for a tenant and it can be argued that a tenant should not be locked into a lease for e.g. another five years if they have not painted the property in accordance with the terms of the lease. Such issues can be dealt with in a dilapidations claim from the landlord; and
• Delivering vacant possession on the break date – again, modifications should be sought to this clause. There is a long line of caselaw of examples where tenants were held to not be delivering vacant possession, such as leaving large quantities of rubbish or contents at a property, so their leases were deemed to be not broken by the court. A tenant should seek amendments such as “free from occupation” or “free from any lawful occupier”.
If you are a tenant and either want to break your lease, or you are considering a new lease in which you wish to insert a break clause or you may have received a break notice from your landlord, legal advice should be sought as soon as possible.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. Greenwoods Legal LLP is a Limited Liability Partnership, registered in England, registered number OC306912. Our registered office is Queens House, 55-56 Lincoln’s Inn Fields, London, WC2A 3LJ. A list of the members’ names is available for inspection at our offices in Peterborough, Cambridge and London. Authorised and regulated by the Solicitors Regulation Authority, SRA number 401162. Details of the Solicitors’ Codes of Conduct can be found at www.sra.org.uk. All instructions accepted by Greenwoods Legal LLP are subject to our current Terms of Business. VAT Reg No: 161 9287 89.