Legal Expert Issues Warning Following New Research

The number of organisations choosing to use the break clause on their property lease is expected to increase during the next 12 months – but according to a leading real estate expert, many tenants could get caught out by onerous or ambiguous clauses.

The warning from Jon Vivian, real estate Partner at national law firm, Irwin Mitchell, follows the release of data from the IPD and Strutt & Parker Lease Events Review 2012, which revealed that nearly half of tenants surveyed left their lease at break.

Jon Vivian said: “The effective exercise of break clauses is becoming increasingly relevant. In a large number of recent reported cases, tenants have been caught out by the intricacies of break clause drafting, with landlords keen to ensure their premises remain occupied for another five or 10 years.

“Tenants must ensure that not only is the break notice itself properly served, but that they have fully complied with all conditions of the clause. It is clear from the recent court decisions that any failure to comply, however minor, will result in an invalid break.

“There are plenty of examples whereby tenants have fallen foul of existing onerous break clauses and it is up to the tenant to protect themselves.”

The recent Canonical UK vs TST Millbank case illustrates the risks clearly. Here the break clause required the tenant to pay all sums payable under the lease, as well as a break premium equivalent to a month’s rent. The tenant argued that, as the break date fell part way through the quarter, only around two months’ rent was payable on the previous quarter and the balance should be attributed  to the break premium. The courts disagreed.

Jon added:  “In practice, a well-advised tenant is no longer prepared to accept onerous conditions when negotiating new break clauses. Many refer landlords to the Code for Leasing Business Premises 2007. This recommends that the only conditions should be that the tenant is up to date with the main rent, gives up occupation of the premises and leaves behind no continuing subleases.

“An alternative in the event of an onerous or ambiguous break clause is a contractual agreement to surrender early in return for an agreed premium. This would at least give a tenant some certainty in its business planning.

“For now, the position remains that tenants need to steer a very careful path when exercising break clauses.”

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