What is a break clause?
Break clauses are commonly inserted in commercial fixed term leases allowing the lease to be terminated early.
There are three types of break clause which are as follows:-
- Landlord only;
- Tenant only; and
- Mutual (where either the Landlord or Tenant may break the lease).
The clause will state who is to be the beneficiary and on which date(s) the clause can be exercised. Generally, a fixed date or dates are stated in the lease as being the break date(s). In other cases, a rolling break may be used which can be exercised at any time after a certain date stipulated in the lease, subject to a specified length of notice being given.
Each break clause will be subject to certain conditions which the party exercising the clause must comply with. Almost all break clauses will require service of a break notice.
The remainder of this article focuses on the issues that can arise when a break notice is served in order to terminate a lease.
Vacant Possession
This relates to tenant only or mutual break clauses. The right to break the lease will likely be dependent on the Tenant being able to give up vacant possession. Vacant possession means to make the property available on completion in a state in which the landlord can both physically and legally occupy it. This includes the removal of any chattels at the property.
Often issues arise when items are left on the property after the supposed break. There is a need to differentiate between a fixture and a chattel. A fixture will remain in the property whereas a chattel should be removed by the tenant. Therefore, if the tenant leaves behind a chattel he may be deemed to have not given vacant possession and the attempted break ineffective.
This problem has been highlighted in the recent High Court case of Riverside Park Limited v NHS Property Services Limited [2016]. In this case the tenant rented a premises which was open plan. Various works were then carried out by the tenant including the installation of partitions. The court were required to decide whether the works were the tenant's chattels or were tenant's fixtures. The court decided that the partitions were chattels. It took into account the fact that the partitions were demountable and that the purpose of the partitioning was solely for the benefit of the tenant. The court stated that the presence of the partitions prevented or interfered with the landlord's right of possession. The break notice was therefore ineffective.
Cases such as this will turn on their own facts. It is imperative any items to be left by the tenant are agreed in writing with the landlord or the break may not be effective.
Defective Notice
This may apply to either the tenant or the landlord, whoever is the Serving Party is in the given case.
All manner of issues can arise such as the wrong description of the property being given, incorrect break date used, notice provisions in the lease not being adhered to and even giving the wrong name for the Receiving Party.
In the case of Standard Life Investments v W & J Linney Limited [2010] an overriding lease was given by the original landlord (L1) to another company (L2). The effect of this was that L2 became the tenant's landlord.
The tenant then decided to issue the break notice as permitted under the lease. A break notice was served within the time limit on L1 (not mentioning L2). They also sent a copy of the notice to L2's agent but in correspondence erroneously referred to the agent as being L1's agent.
The latest date for exercising the break had passed and then the tenant's solicitor decided to write to L2 enclosing a copy of the notice stating that it had been served "on our client's landlord". L2's solicitors argued that the notice had not been served on them. The court agreed that the tenant had not validly exercised its break as the tenant had not served the notice on the immediate landlord who was L2.
Payment of rents
Typically, there will be a provision in the break clause which states that all rents must be paid for the break clause to be effective. This may include service charge, interest and insurance payments.
The case of Avocet Industrial Estates LLP v Merol Ltd & anor [2011] illustrates how strictly such a provision may be interpreted. In this case there was a provision that stated that the break was to be of no effect if any payment due under the lease had not been paid. The lease provided for default interest if the rent was paid late. The tenant occasionally paid the rent late yet the landlord never requested the default interest. The landlord in this case successfully claimed that the default interest was technically due and therefore the break ineffective.
Conclusion
The above examples are just some of the ways in which a break notice can be ineffective.
There are plenty more ways a break clause can be ineffective, therefore, it is imperative when considering to exercise a break clause in a lease you seek legal advice well in advance of the time limit imposed by the particular lease for serving the break notice.
If you would like further information on any of the above, contact us today to discuss your individual requirements in further detail, our commercial property department will be happy to assist you. Contact us on 01603 693500, email us using 'Make an enquiry' form, or during offices hours use the 'live chat' facility.
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