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Talking Business: Break clauses in leases from a tenant’s perspective

In an omnichannel retail world, bricks and mortar can hang around the necks of tenants like an albatross. Tenants will usually take this into account and agree break dates with their landlords, so that they have the opportunity to exit properties that are not performing.

But life is not always so simple.

At Dechert LLP we recently advised a retail tenant in connection with a defective break notice which was drafted and served on the retailer’s landlord by another City law firm. Whilst the retailer in question was able to extricate itself from the lease, it was an unfortunate episode, and serves as a reminder that tenants (and their lawyers) must have their eyes wide open when negotiating and drafting break clauses and serving break notices.      

Over the past few years we have also noticed that landlords’ lawyers are more likely to challenge break notices, sometimes for legitimate reasons (as in the case I have just mentioned), and at other times to frighten tenants into concessions or negotiation. There are particular landlords we encounter whose starting (and sometimes ending) position is to challenge all break notices – extra care and attention is needed when negotiating break clauses in these leases and when serving the break notice not to fall into the traps of these ‘predator landlords’.       

Below are examples of common mistakes or technicalities upon which a landlord may contest a break notice:

Service of the break notice

  • missing the deadline for service of the break notice.
  • where the lease specifies a particular form of notice, not using that form
  • serving notice from the wrong person, for example a subsidiary of the tenant named on the lease, or on the wrong person, for example, where the original landlord has since granted an overriding lease to a third party and that third party becomes the tenant’s new landlord.
  • not following the method of service that is strictly set out in the lease. Where the lease specifies notices are to be sent to the landlord’s registered office, for example, sending the break notice to its place of business will be ineffective.

Payment of sums due under the lease

  • failing to pay the correct amount of rent. This is particularly problematic where the break date falls on a quarter day or part way through quarter. In this instance the full quarter’s rent must be paid for the break to be effective.
  • failing to pay “all sums due” under the lease. This may include less obvious sums owing to the landlord, including service charge, interest on arrears and landlord’s costs. In a High Court case, a break was held to be ineffective where the tenant failed to pay £130 interest due on late rent, even though the landlord had never issued a demand for it.  Tenants should also be wary even where a break clause does not expressly require the payment of “all sums due”,  as the definition of “rent” elsewhere in the lease may require the tenant to pay up these other sums in full.

Vacant possession

  • not being precisely clear about what is meant by “vacant possession” and the exact condition or manner in which the premises needs to be handed back to the landlord. A tenant has previously failed to give vacant possession in accordance with the terms of a break clause because two workmen it employed to carry out works to the premises remained there after the break date to finish outstanding repairs. Continued employment of a security guard following the break date due to a concern that the premises would be vandalised also constituted a breach of the vacant possession condition.

Carrying out works to the premises

  • failing to carry out works to the premises that are specified in the break clause. Such works may be onerous for a tenant to comply with; for example, a condition that requires the tenant to repaint the premises with three coats of paint but the tenant uses only two will mean the break is ineffective and the lease continues on the same terms.

Not actually intending to break

  • serving a break notice without intending to end the lease or a later change of mind by the tenant. In a tenant’s market, the tenant may wish to threaten to procure more favourable terms from the landlord. However, where the tenant actually serves the break notice, it cannot be unilaterally withdrawn later which may mean greater expense for a tenant, particularly where a landlord increases rent to take advantage of the mistake or change of mind.

How to avoid falling into the traps:

It is crucial that tenants know and do exactly what their break clause requires of them. Planning in advance, diarising and seeking advice early are all helpful here. In addition, tenants should consider the check points referred to below to minimise the risk of losing their break right. Remember, landlords are often willing to run minor, technical points to prevent a tenant from breaking the lease and retaining the revenue stream provided by rental payments, especially where tenants are hard to come by. Notwithstanding the expense and effort involved in a tenant adopting some of the suggestions below, it will likely be worth it to avoid having to remain in expensive or inadequate premises:

  1. Keep documentary evidence of how you have complied with the conditions of the break clause, in particular, the method and date of service of the break notice.
  2. Seek advice on the terms of the lease and the conditionality of the break clause both at the time of entering into the lease and prior to effecting any break rights later on. When negotiating future leases try to push for an unconditional break right.
  3. Consider instructing surveyors to carry out a compliance audit prior to serving the break notice. That way, you will be aware of the extent to which you have not complied with the lease terms and the likely cost and time needed to remedy such for the break to be effective.
  4. Consider paying outstanding sums, even where these are disputed. Payment can be made on a without prejudice basis and disputed following a successful break.
  5. Double check for late payments and whether interest is due on them. If so, include these sums when you pay up to service of the break notice or the break date itself.
  6. Ensure payments are made in cleared funds by the required dates.
  7. Consider liaising with the landlord to seek confirmation of the steps you need to take to break the lease effectively (although the landlord is not required and may not co-operate).
  8. Ask the landlord what exactly is meant by “vacant possession” and document it. Take photographs of any steps you then take to comply with the vacant possession condition, for example, removal of furniture.
  9. Bear in mind, at an early stage, that repair, redecoration and reinstatement obligations that you are required to fulfill as conditions to a break clause may require third party consents and will require time to undertake. Ensure that consents are obtained sufficiently in advance of the break date to allow such works to be completed.

Lessons to be learned:

  • Attempt to negotiate an unconditional break clause in your lease, or if that is not possible, minimise the break conditions so that they are easily complied with.
  • Take care to serve the break notice in the required form, to the correct party and at the correct time.
  • Be aware of who your landlord is:  If your landlord is a ‘predator landlord’ they will treat you as predators do. If you want to be in a position to escape, you need to plan your escape early on - at the time of negotiating and agreeing the wording in the break clause – do not leave it to the last minute!

Isaac Bordon is a solicitor in the Real Estate department at Dechert LLP and has significant experience in the retail sector.

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