Thursday, 10 February 2011

Lease Break Clauses – When Is A Landlord’s Break Clause Effective?

Can landlords make use of break clauses in commercial leases?

In my other posts on break clauses I've mostly looked at terminating commercial leases from a tenant’s point of view.

Now let’s suppose you're a landlord. Can you also have a break right?

The short answer is yes, but for it to be effective, make sure it's dealt with correctly when the lease is granted.

What should landlords do when granting new leases?

As a landlord, you will only have an effective break right if:-

1.   The lease contains a break clause that says you, as landlord, can terminate the lease; and

2.   The lease has been excluded from the security of tenure provisions of the Landlord and Tenant Act 1954 (1954 Act), sometimes called “contracting out”.

The comments I make in Lease Break Clauses – What Can Possibly Go Wrong? about serving notices apply equally to notices served by a landlord. You have to get the notice absolutely right and serve it strictly in accordance with the requirements of the lease, or you'll lose the right to terminate the lease.

If your lease contains a landlord’s break clause but it hasn't been contracted out, what happens if you serve a break notice on your tenant anyway?

If you do that, the contractual term will be brought to an end on the break date, but your tenant may still have statutory rights to renew its lease under the 1954 Act.

To have a chance of ending the lease on the break date you must also serve a statutory notice under the 1954 Act as well as the contractual break notice - so you have to serve two notices.

The statutory notice is called a "Section 25 Notice" and the rules governing the timing and service of such notices are complicated - they're certainly outside the remit of a blogpost and are something on which you would need to take professional advice. 

You might not, for instance, be able to serve both notices at the same time - even if you intend them to take effect on the same date.

So although by serving the break notice you've shortened the contractual term of the lease, the tenant may still be able to use the statutory procedure to get a new lease which, from a landlord’s point of view, would defeat the object of having a break clause in the first place.

Is a landlord’s break clause totally useless if the lease has not been contracted out?

Not necessarily. 

Let’s say you are the landlord of a 10 year lease of property with a landlord’s break right at year 5, but the lease hasn't been contracted out. 

After a couple of years you decide you'd like to redevelop the property and then re-let it for more money, and eventually you get planning permission to do so. 

You serve the break notice, which will shorten the contractual term and bring it to an end at year 5. 

You can then oppose your tenant’s right to ask for a new lease on the ground that you intend to redevelop the property, which is one of the statutory grounds for opposing lease renewal under the 1954 Act. 

To do that, you need to serve a Section 25 Notice on the tenant in addition to the break notice (and you'll need to take advice on the timing of the notices).

If you succeed in proving the statutory ground, you'll have got rid of your tenant, although you'll have to pay your tenant statutory compensation under the 1954 Act.

Another statutory ground for opposing lease renewal you might be able to use, depending on the circumstances, is where you can show a genuine intention to reoccupy the property yourself. But there are complex rules governing the availability of this ground and again you'll have to pay your tenant compensation if you succeed.

So if the lease isn't contratcted out, it’s not ideal. 

Your opposition to lease renewal might fail (this has been the cause of a great deal of litigation over the years). 

Even if you succeed, you'll have to pay your tenant compensation. 

Nevertheless, depending on the circumstances one of these scenarios might work for you commercially.

So if you're a landlord granting a new lease and want an effective landlord’s break clause, it's important to make sure the lease is contracted out of the 1954 Act.

By the way, a lease does not have to be contracted out for a tenant’s break right to be effective.

The above is only an outline of course and you should always seek professional advice.

UPDATE 9/5/12

I have noticed this post is still popular with quite a lot of readers of this blog. Having received a few questions privately from readers, I have rewritten it slightly to make it clear that if a lease is not contracted out, to have a chance of making the break clause work, as a landlord you would need to serve both the contractual break notice and a Section 25 notice opposing renewal. 

I must reiterate however, the comments made in this post are really just for general information - not legal advice. It's a complicated area of law.

As far as the timing of the notices and the likelihood of success under the 1954 Act procedure are concerned, these are things on which you would need to take professional advice, ideally from a property litigation specialist. 

Here's a link to my other posts on break clauses, both before and after the date of this post.

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