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Wednesday, 26 January 2011

Lease Break Clauses – What Can Possibly Go Wrong?



In my post Lease break clauses – what if you change your mind? I looked at what happens if you are a tenant, you serve a break notice terminating your commercial lease, but later on you change your mind and want to stay.

But let’s say you really want to go.

When you try to make use of a break clause to end your lease, can anything go wrong so that the lease doesn’t end and you have to carry on paying for space you no longer need and no longer want?

In a difficult market landlords will be keen not to let their tenants leave, so getting this wrong can be a disaster. You should always take professional advice to make sure this is handled properly, but here are some important things to look out for.

Do you have the benefit of the break clause?

The break clause must be read carefully before your break notice is served. If you are not the original tenant (because the lease has been assigned to you), then you need to check that the break right isn’t the kind that can only be exercised by the original tenant.

A personal right to end a lease, meaning one that was only given to the original tenant, is lost after the lease has been assigned. If the break right is not personal, then it can be exercised by you as the current tenant.

When can you end the lease?

The break clause might specify a once-only break date, or several different break dates throughout the term, or it might provide for a right to end the lease at any time after a specified date. If there is only one break date, make sure you haven’t missed it.

Have you served the break notice properly?

When drafting and serving the break notice, advisors must take great care to read the terms of the lease very carefully, both the break clause itself and the general provisions in the lease dealing with serving notices, and must comply with them to the letter.

The courts interpret these provisions strictly and a mistake can mean the notice has not been validly served and the right to end the lease has been lost.

If there are no provisions for serving notices in the lease (which is rare these days), then the position is governed by s196 of the Law of Property Act 1925 which provides that a notices can be served personally or by recorded or registered post on the landlord’s last known place of abode or business, provided it is not returned undelivered.

Make sure the notice is served on the right person. Your landlord may have changed and you may need to search the Land Registry to verify ownership. It might not be the same name that appears on rental invoices.

Whether or not you can serve a notice on the landlord’s agents depends on whether the agents have authority to accept notices on the landlord’s behalf. It is safer to serve the notice on both the agents and the landlord itself.

There is no special form of notice prescribed by law, but the lease might include a form of notice that must be used, so again check the lease carefully.

And make sure you serve the notice in the right name - see my later post Lease Break Clauses - Get Your Own Name Right!

Have you served the notice in good time?

The break clause will usually provide for prior written notice to be given to the landlord by a minimum number of months before the break date. This notice period can often be quite long, say 9 months or a year before the break date, but sometimes it may be shorter.  Whatever the period is, time is of the essence for notice periods whether the lease actually says so or not. That means if you are too late in serving the notice, even if only by one day, you will lose the right to end the lease. Notices should therefore be served as far in advance of the minimum notice period as is commercially viable (but not too far in advance, or you might change your mind!).

Do you need to send a copy of the notice to anyone?

In The Hotgroup plc v The Royal Bank of Scotland Plc [18 may 2010] the court ruled on a notice provision in a lease which said that a notice was not validly served unless a copy was also served on the landlord’s agents. This provision was designed to ensure that a notice did not "gather dust" in the landlord's offices, but came to the attention of the person with actual responsibility for the management of the property.

Although the notice was served on time, the copy was served at a later date and was unfortunately out of time. The court held that the break notice was therefore ineffective and the lease was not ended. Therefore you need to check carefully whether the lease says you must send a copy of the notice to someone. If it does, be sure to send the copy at the same time as serving the original notice.

Do any conditions need to be complied with?

Break clauses often provide that certain conditions have to be complied with by the time of the break date, and that if those conditions have not been complied with, the lease will not come to an end. Therefore it is vital you look at what conditions apply (if any). If there are conditions, make sure you comply with them to the letter.

For example you might have to pay a premium to the landlord on the break date. This would normally be specified in the break clause. If so, make sure it is paid to the landlord in good time.

Here are some other conditions often seen in break clauses which you need to look out for.

·         The rent must be paid up to date at the break date

This condition isn’t as straightforward as it looks. For example, service charge might have been reserved as rent, and that won’t necessarily be a fixed amount; or the lease might say "all sums" have to be paid. If so, you need to get from the landlord a confirmed amount of what is due to be paid by the break date.

The clause might only require the “principal” rent to be paid up to date. However, if the rent is paid quarterly in advance then that means a full quarter’s rent must be paid for the last quarter, even if the break date doesn’t coincide with the quarter day. So for example if the break date was 10 October 2011, you would still have to pay a full quarter’s rent on 29 September 2011 and you won’t get back what you have paid for the period 10 October 2011 to 24 December 2011 even though you have gone! This is because there is no common law right to apportion rent.

You might be lucky and the break date will fall on the quarter day; or if not sometimes the lease might oblige the landlord to reimburse you the balance of the quarter’s rent. However, unless the lease actually obliges the landlord to refund to you any rent or other sums paid beyond the break date, you are not automatically entitled to a refund. However, it is still better to make the payment in full and hope the landlord might give you some of it back than to lose your right to end the lease.

·         The lease covenants must be complied with at the break date

It can be very difficult to be certain you have complied with this condition (which is why, as a tenant, you should never agree to it in the first place!). The landlord might say the break clause hasn’t been complied with even if there has only been some minor breach, such as a bit of minor disrepair.

The condition might instead require that there is no “material” breach of covenant at the break date. Your position as tenant is stronger here. A court would try to look at this objectively. A material breach is not a trivial breach; it must affect the landlord’s ability to sell or re-let the property without delay or additional expense. Minor breaches of repairing or decorating obligations that do not affect those dealings are unlikely to amount to material breaches.

Have a survey carried out to determine what work needs doing and do all of it before the break date. You might need to move out before the break date so that all the work can be done. You cannot leave on the break date without doing the work and then offer to pay damages in the way you can with dilapidations on a normal expiry of a lease term.

·         Vacant possession must be given at the break date

This condition often causes problems, as landlords might be able to argue that vacant possession has not been given if you have left anything behind at the property.

Does accidentally leaving an old coffee cup on the floor mean you haven’t given vacant possession? Probably not, but the best thing is simply to clear everything out to avoid any argument. If any employees remain at the premises, or if you carry on using part of them for storage, you are likely to be found not to have given vacant possession.

Give the keys back! Keeping the keys beyond the break date will probably mean you have not given vacant possession. If the keys have been lost, change the locks and give all the new keys to the landlord. If you have installed an alarm, give the code to the landlord so it is not prevented from entering the premises.

Get rid of any trespassers! If any trespassers are present on the property on the break date then you haven’t given vacant possession. Clearly this is a concern if you have actually left the premises some time before the break date. You need to make sure the premises are kept secure for the period leading up to the break date and keep regular checks to make sure no one has broken into them.

If you have any subtenants or someone sharing the premises (such as a concessionaire or franchisee), you have to make sure they all vacate the premises by the break date too. Your break clause will only work if you know you can terminate any subleases or sharing agreements and get rid of the subtenants or sharers by the break date.

Finally, don’t forget to leave!

Even if there is no condition to give vacant possession, don’t forget to leave the premises on the break date. If you outstay your welcome the landlord might choose to invoke its right under s18 of the Distress for Rent Act 1737 and claim double rent for the period in which you remain there as a trespasser. They took a hard line in the eighteenth century!

Breaking up can still be hard to do even if you haven’t changed your mind. The moral this time is if you really want to go, make sure you do everything the lease says you have to do to comply with the notice provisions and the break clause.

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