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Tuesday, 11 October 2011

Lease Break Clause Strategy

Break clauses – drafting new ones and operating old ones – are still a hot topic for property professionals as individuals and companies look to get out of property they no longer want, or can no longer afford.

A tenant’s need to get out of property because of downsizing, downshifting or just trying to stay solvent will more often than not be equally matched by a landlord’s desire to keep the tenant tied to terms that might have been agreed in the boom years, but which no one else would be willing or able to sign up to today.

If you are a tenant, when you operate your break clause, you have to get it right because time after time the courts have shown themselves unwilling to bend over backwards to rescue a tenant from the consequences of a mistake that on the face of it appears to be a mere technicality, but which can result in the tenant not being able to escape its lease for the duration of the term.

Getting it wrong can be the most expensive mistake a tenant can make.

I have posted several times on this blog about break clauses, but as the topic remains as relevant now as it ever was, it might be useful for you to have a strategic reminder and links to the relevant posts.

For the most common mistakes made by tenants operating break clauses and examples of the conditions that sometimes have to be complied with, see What Can Possibly Go Wrong?

It is vital to ensure a break notice is served on the right person, and if you are a landlord that your managing agents respond in the right way (or better still, don't respond), see Don’t Get Caught in the Landlord’s Web.

If you do get it wrong, there might still be time to remedy the situation, see If You Get it Wrong, You’ll Get it Right Next Time.

And whatever you do, make sure you get your own name right, see Get Your Own Name Right!

The break right might be personal to the original tenant only, and so of no use to subsequent tenants, see This Time it’s Personal!

You might be obliged to give “vacant possession” as a condition of breaking the lease; for a discussion of what that means see Pretty Vacant.

Then again, you might serve the notice and get everything right, but then you change your mind and want to stay at the premises after all. What then? See What If You Change Your Mind?

And if you’re negotiating a new lease, you will want a simple and effective break clause without any onerous conditions, see What Should You Agree in a New Lease?

There are special considerations to think about if you want to have the ability to get out of only part of your premises, see Want an Option to Quit Part of Your Premises? Why Does the Law Get in the Way?

It’s not just tenants who want break clauses, landlords do too sometimes.

How can break clauses be effective for landlords? See When is a Landlord’s Break Clause Effective?

For a more complicated example of how a break clause can go wrong for a landlord, where there are issues of “estoppel” and renewal rights, see More Food for Thought For Landlords.

Given the times we live in, I suspect there will be many more tales of break clause bungling in the months to come.

I’ll try to keep you posted.

Always take professional advice as soon as possible if you are going to operate a break clause or if you are negotiating a new one.

2 comments:

  1. Here are some comments from Linkedin (where I linked to this post):

    Tom Stokes: There are other ways to renting property rather than just leasing and I believe occupiers prefer more flexibility rather than just break clauses.
    Please have a look at my blog where I have written about flexibility and the differences between a lease and a licence
    http://thebusinesscentrespecialist.wordpress.com/

    Michael Gillespie: Tom that's a great point from an occupiers point of view.... my concern here is that a lot of people are forgetting one thing........... and that is that nearly all of our pension schemes are asset backed in one form or another. That asset backing usually takes the form of property. Undermine the asset backing of the property holding then its little wonder our pensions are not going to be able to provide the long term income streams we all want in our old age.... Not judging here just putting this out there for people to consider.

    Jon Dickins: Thanks, interesting comments. Tom, I don't see licences being adopted across the whole property industry, because of they do not fit the investment model (as Michael says) and because of the undoubted legal difficulties which can stem from inadvertently creating a lease. Relying on the grounds for opposing lease renewal provided by the 1954 Act is fraught with difficulty and uncertainty (there are volumes of caselaw on this), and shutting down services etc leaves you open to claims for breach of quiet enjoyment or derogation from grant. That's a lawyer's view though! Interesting what you say about this not generally being a problem in business centres. In retail, there is also now the "meanwhile lease" concept (which I've written about on my blog) for short term lets of empty shops. And there is always the safe alternative of granting short leases outside the 1954 Act, which can be done relatively quickly.

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  2. Here is a further comment from Tom Stokes on LinkedIn:

    I am talking about letting to SME's and not larger organisations (although many are now opting for more flexible agreements because of the uncertainty in the economy and changes in working practices). I appreciate that there is an effect on asset values but this is driven by the misconception that flexible agreements are less secure that those let on traditional leases. I am prepared to argue that if properly managed, a portfolio based on flexible agreements is more secure and more cash positive than one run on a traditional basis. But management styles have to change. If there is any interest in this I am happy to blog it and send it round to generate some debate
    Tom

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