“If the notice clause had said that the notice had to be on blue paper, it would be no good serving the notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease”
Lord Hoffman in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd
Break clauses in leases are becoming more common in the current market. Correctly exercising a break clause can be more difficult than it may at first appear, and making a mistake can be very costly.
Getting the basics right
Exercising a break clause can be easier said than done. A landlord’s or tenant’s business could be ruined if the break option is not exercised correctly. Achieving this can involve a lot of planning and expense before serving the notice and a lot of work before the break date.
As obvious as it may seem the first point on deciding whether to exercise a break notice is to check that the lease allows the current landlord or tenant to exercise it. It is also important to serve it on the correct party. If there is any doubt as to who the notice should be served on, it should be served on more than one party with each notice made without prejudice to the effect of the other. It is also important to check the provisions for service in the lease and get both the address and the method of service correct. Again, if there is any doubt, the notice should be served on every possible address and using any means allowed by the lease, which will usually involve service by hand and by recorded delivery.
The notice should be worded clearly, following the wording in the lease, making it clear that the break is being exercised and specifying the termination date if possible. The termination date should be checked carefully to ensure that the correct amount of notice is being given and that the date specified is permitted under the lease. The Mannai case referred to above states that a minor defect may not invalidate a notice if a reasonable recipient would understand the meaning, but there is still a strict requirement to comply with the terms of the clause. It is best to assume that the notice needs to be spot on!
It is important to check whether the lease is contracted out of the Landlord and Tenant Act 1954 (LTA 1954). Particular care should be taken with landlord’s break options where the lease has not been contracted out. A single notice may satisfy the requirements of both the break clause in the lease and the LTA 1954 but this will not necessarily be the case. Further legal steps may be required and specialist advice should be sought and extra time allowed for these steps to be taken.
Conditions – pitfalls for the unwary
Many break clauses can only be successfully exercised if certain conditions are met. They are commonly imposed on the tenant rather than the landlord unless, for example, a landlord must have an intention to redevelop in order to exercise a break clause. A break notice served correctly does not take effect if the conditions are not met. A party wishing to exercise a break clause should therefore consider before serving a notice whether the conditions can be met. The conditions could affect the timing of a notice, for example, if residential sub-tenants need to be evicted for the vacant possession condition to be met.
A common condition is that the tenant must give vacant possession. Vacant possession does not just mean that there should be no people in the premises. The landlord must be able to “assume and enjoy immediate and exclusive possession, occupation and control of it” (NYK Logistics (UK) Ltd v Ibrend Estates). The tenant must not leave any tenant’s fixtures or chattels in the property which “substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property” (NYK Logistics). Complying with a vacant possession condition requires a lot of planning. It has previously been decided that a tenant failed to give vacant possession where large quantities of rubbish were left in the property or where workmen remained behind after the expiry of the lease term to finish off outstanding repairs. Tenants should plan ahead to ensure that any works required to comply with their repairing obligations are finished in advance of the break date and that the property is cleared of the tenant’s belongings. Particular care should be taken with leased items that are used in connection with the tenant’s business as the tenant may be reliant on third party suppliers to uninstall and move them.
Another common condition is that the rent (and possibly other sums due under the lease) must be paid up to the date at the time that the lease terminates. Depending on the wording of the lease, the tenant will probably have to pay a full quarter’s rent even if the break falls during a quarter. Also depending on the wording of lease, the tenant may not be entitled to a subsequent refund of the balance of the rent paid for the period after termination. A tenant may therefore wish to consider the timing of the exercise of a rolling break clause.
An increasingly less common condition, given the uncertainty created, is a requirement for compliance with covenants in the lease. The main focus will usually be on the tenant’s compliance with repairing covenants. It is important to check the lease as to the date on which compliance will be considered. It is commonly the break date but it could also be the date of service of the break notice, which would place an extra burden on the tenant. A requirement for “absolute compliance” means that the party must avoid even a trivial breach. There is uncertainty as to the legal interpretation of “material compliance”. If a condition of this type is in place, a tenant needs to consider whether it can actually afford to exercise the break clause.
A party planning to exercise a break clause should:
- Plan well in advance
- Consider whether they definitely want to exercise the break clause (as a break notice can’t be withdrawn)
- Think about the costs and practicalities of complying with any conditions
- Assume the worst – the other party may well want to try to argue that the break notice is invalid, in order to keep the lease running
- Talk to the other party once the notice has been served, in order to establish whether there is any indication that the validity of the notice is being challenged and to discuss any practicalities relating to complying with the conditions and giving vacant possession on or before the termination date
- Consider instructing a lawyer to prepare and serve it on their behalf!