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Break clauses in commercial property leases

Break clauses are common in commercial leases. The opportunity to end a business lease early is useful to both commercial tenants and landlords, but how the tenancy agreement is drafted can have an effect on whether you can actually exercise the break clause.

What is a break clause in a commercial lease?

A break clause (when exercised) in a commercial lease can be included in a fixed-term lease allowing either the tenant or landlord to bring the lease to an end early. Sometimes leases include breaks for both the landlord and the tenant and have been included as part of the negotiations at the Heads of Terms stage. Sometimes the break clause is personal to the original landlord or the original tenant or both of them.

Depending on how the lease has been drafted, the right to break the lease may:

  • arise on one or more specified dates;
  • be exercisable at any time during the term of the lease on a rolling basis;
  • require a formal notice to exercise a break clause

A break clause may only be exercised if any conditions attached to it have been satisfied. For example, if the tenant seeks to exercise its break clause, the clause might specify that the tenant must give vacant possession of the property at the date when the lease is to come to an end (see examples of pre-conditions below). A break clause will be strictly construed by the courts and any conditions must be strictly performed.

What happens if you don’t have a break clause?

Simply put, if there is no break clause, then a fixed-term lease will not come to an end early.

Examples of pre-conditions often attached to break clauses

Some examples of pre-conditions often attached to break clauses are as follows:

  • The tenant must have paid all the rent (or all payments due under the lease)
  • The tenant must have performed all its covenants
  • The tenant must not be in material breach of its repairing covenants
  • The tenant must give vacant possession (or that the tenant gives up occupation and leaves behind no continuing underleases)
  • The landlord must have an intention to redevelop the property
  • Any underlease is to be contracted out of the Landlord and Tenant Act 1954

The break clause should specify whether the conditions must be satisfied at the date of service of the break notice or at the break date, or both.  (See Reed Personnel Services plc v American Express Ltd below.)

The relationship between a break clause and other provisions of a lease

Break dates are often linked to rent review dates so that, if the rent increase is too great for the tenant, the tenant can bring the lease to an end early. As time is of the essence for the break clause (see United Scientific Holdings Ltd v Burnley Borough Council below), such a link will generally also make time of the essence in relation to any time limits in the rent review clause.

If a headlease is terminated by the exercise of a break clause, then any underlease also ends. This applies whether the break was exercised by the landlord or the tenant and even where the underlease was granted with the consent of the head landlord. However, if Part II of the Landlord and Tenant Act 1954 applies to the underlease, a statutory tenancy will arise on the termination of the underlease.

Consideration should also be given to both on the effects of service of a break notice.

Mutual break clause

A mutual break clause enables either the landlord or the tenant to terminate a lease at any time during the term. (See Littman and another v Aspen Oil (Broking) Ltd below.)

Break clauses and payment: meeting payment dates, excess payments, disputed payments

A break clause will be strictly construed and any conditions attached to the right must be strictly performed. In particular, time will be of the essence in respect of the time limits in the clause.

Considerations on payments connected to break clauses should include the following:

  • Pay any outstanding sums due, even if these are in dispute. Payment can be made on a ‘without prejudice’ basis and discussed later (particularly as such payment may be a condition of the break clause).
  • Interest in respect of late payments may be payable, so check if any such interest is due in respect of arrears in the past. There may be interest due on historic arrears, even if the arrears have been cleared and the landlord has not requested the interest. Err on the safe side when paying and over-estimate the amount due for interest. The exact amounts owed can be settled later.
  • Make sure that payments are made in cleared funds by the required date, unless the landlord has expressly agreed to accept a cheque.
  • Don’t assume the tenant is obliged to pay only an apportioned part of sums due under the lease, for the period up to the break date. The lease may require full payment.
  • If the tenant is obliged to pay any sums in advance, such as rent, service charge or insurance rent, check to see if the landlord is obliged to refund any part of those sums that can be attributed to the time after the lease ends. The tenant will not normally be entitled to a refund of rent paid in advance, unless there is an express provision in the lease to the contrary (see Marks and Spencer v BNP Paribas below ).
  • Ask the landlord for confirmation of the steps required to comply with any conditions in the break clause. In particular, the tenant may want to be sure that it has complied with its repairing obligations under the lease. In order to do this, the tenant may ask the landlord to prepare a list of items that are in need of repair and for which the tenant is responsible under the lease. This list is known as a schedule of dilapidations.
  • If a tenant agrees to carry out works to the property before the break date, be careful to ensure that the works are completed and vacant possession is given by the break date.
  • Consider asking the landlord to accept the break notice on payment of an agreed amount as liquidated damages for any outstanding breaches of covenant. (Liquidated damages are a fixed or determined sum agreed by the parties to a contract to be payable on breach by one of the parties).
  • Ensure that any waiver of a break clause condition by the landlord is not made ‘without prejudice’ and it is clear to which condition(s) the waiver applies.
  • There may be general obligations that apply at the end of the term of the lease, which will need to be complied with before the break date. For example, the lease may require the tenant to remove signage, reinstate alterations and redecorate the property. Reviews of any supplemental documents should also be made, such as any licences granted for works to the property, in case these contain obligations that are relevant to the break

When and how to give notice for a break clause

Consider carrying out a compliance audit with a surveyor’s advice before serving the break notice. A tenant can then take steps to remedy any breaches of the lease to ensure compliance with its covenants. This is particularly important where such compliance is a condition of the break clause.

Serve the break notice in good time and strictly in accordance with the terms of the lease. The lease may contain provisions relating to serving the break notice that are not in the break clause itself. If there are two or more tenants, usually the break clause must be exercised by all of them. (See Joint tenancies: Hounslow LBC v Pilling below).

Keep evidence of the method of posting or delivery of the notice. If there are no provisions in the lease that relate to serving the break notice, the party serving the notice could request that the receiving party acknowledge receipt, although the receiving party is not obliged to comply with that request.

If the notice is being served by an agent, make sure the receiving party is aware of the existence of the agency arrangement and the agent’s authority.

Once a notice exercising the break clause has been served, it cannot be withdrawn. This means that the party exercising the break clause must be sure that it wants to end the lease early before serving the notice triggering the break right. Even if the landlord and the tenant both agree to waive the break notice, this does not prevent the lease from ending. Instead, the agreement between the landlord and the tenant will be deemed to constitute the grant of a new lease that will take effect immediately after the original lease ends under the break clause.

Precedents in case law on break clauses in commercial leases

Rectification of obvious mistakes: Littman vs Aspen Oil
In Littman and another v Aspen Oil (Broking) Ltd [2005] EWCA Civ 1579, an obvious mistake was made in a mutual break clause, which contained a proviso that if the landlord gave notice, the notice would be effective only if the tenant had complied with its obligations. The proviso should have applied to a tenant’s notice rather than a landlord’s notice. Fortunately for the landlord, the Court of Appeal agreed that there had been a mistake, and that the lease should be rectified.

Conditions: Reed Personnel vs American Express
Conditions to a right to break must be strictly performed (Reed Personnel Services plc v American Express Ltd [1997] 1 EGLR 229).

Time limits: United Scientific vs Burnley Council
Time is of the essence in respect of any time limits in the break clause (United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904).

Joint tenancies: Hounslow LBC vs Pilling and Fitzhugh vs Fitzhugh
Where there are joint landlords or tenants, the break clause must be exercised by all of them unless one of them has the authority of all to exercise on their behalf (Hounslow LBC v Pilling [1993] 2 EGLR 59), although this may be overridden by the express terms of the lease. See also Fitzhugh v Fitzhugh [2012] EWCA Civ 694, in which the Court of Appeal held that a notice purporting to terminate a licence was invalid as it was served by only one of the joint licensors.

Rents paid to break date and entitlement to refunds: PCE Investors vs Cancer Research and Marks and Spencer vs BNP Paribas

In PCE Investors Ltd v Cancer Research UK [2012] EWHC 884, the High Court considered whether a tenant had complied with a break clause where it paid rent up to the break date, rather than the full quarter’s rent. The break clause required the tenant to give vacant possession and pay ‘the rents reserved and demanded by this Lease up to the Termination Date’. The court held that the tenant should have paid the full quarter’s rent to validly terminate the lease

The widely-accepted view, which had been reflected in the case law, was that any rent paid in advance in respect of the period after the break date will not be recoverable by the tenant in the absence of an express provision.

However, in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2013] EWHC 1279 (Ch), the High Court implied a term into the lease entitling the tenant to a refund. The tenant had exercised a break clause, ending the lease early. It sought a refund of parts of payments it had made in advance in respect of rent, service charge, car parking and insurance charges, which related to a period after the break date. The High Court decision surprised the property industry, although in fact it was quite limited in effect and was based on the specific terms of the lease.

In May 2014, the Court of Appeal handed down its judgment in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2014] EWCA Civ 603, which overturned the High Court decision.

The Court of Appeal ruled that it was not appropriate to imply a term into the lease that entitled the tenant to a refund of the rent and other monies that it had paid in advance in accordance with the express terms of the lease. The tenant sought leave to appeal, which was granted on 11 November 2014.

On 2 December 2015, the Supreme Court handed down its judgment in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72. The Supreme Court, like the Court of Appeal, found in favour of the landlord. Lord Neuberger (who provided the leading judgment) approved the Court of Appeal decision in Ellis v Rowbotham.

What next?

We recommend you consult with a commercial property lawyer in good time before serving the break notice, so the issues highlighted above can be dealt with. You should talk to a lawyer for a complete understanding of how it may affect your particular circumstances. Contact us on 0800 689 1700 for a complete understanding of how a break clause may affect your particular circumstances, make an enquiry or fill out our contact form below.

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