Morgan Russell Solicitors

Tenant Break Clauses - Avoiding the Pitfalls

In the current economic climate, many tenants who are anxious to dispose of premises they no longer require are looking at ways in which they can bring their commercial leases to an end. However, exercising a tenant’s break clause can be full of pitfalls and a failure to comply with the requirements of the lease is likely to lead to a challenge by the landlord, who will be keen to avoid the costs and effort of finding a new tenant in a difficult market.

1.      Typical components of a break clause

A break clause typically requires prior notice of the landlord or the tenant’s intention to break (commonly not less than six months) as well as compliance with certain pre-conditions. Pre-conditions can be either ‘absolute’ or ‘qualified’.

An absolute pre-condition will be a strict requirement for the tenant to, for example, comply with its obligations under the lease. By contrast, an example of a qualified pre-condition would be a requirement that the tenant ‘materially complies with all its obligations under the lease’.

Commonly, the following pre-conditions must be satisfied before the break clause can be exercised:

1.1          Compliance with lease covenants

Case law has shown that there may be a distinction where a pre-condition to comply with lease covenants is expressed to be absolute, and where it is qualified. There is no discretion to vary an absolute requirement to comply with covenants under the lease – if a tenant does not satisfy that pre-condition then the break clause will not be exercisable.  However, where a break clause requires the tenant to have ‘reasonably performed and observed the covenants of the lease’ and the tenant has made efforts to, for example, carry out repair works to the property but without the necessary co-operation of the landlord, then it may still be possible for the tenant to have satisfied its repair obligations under the lease and so exercise the break clause.

1.2          Vacant possession

Strictly, giving ‘vacant possession’ means that the landlord should be able to go into occupation on the break date. However, it may be possible for the effects of this pre-condition to be waived where the landlord and tenant have entered into a settlement agreement as to dilapidations at the property, but on the break date the property is still being cleaned and the keys have not been returned to the landlord.

 2.      Who can exercise the break?

Where the break is expressed to be personal to the tenant and the lease has been assigned, case law has shown that only the assignee (i.e. the current tenant in possession) is entitled to terminate the lease. Where a tenant assigns its lease and the lease is subsequently re-assigned to that tenant, its original right to break under the lease is irretrievably lost. One way to get around this would be for a tenant to retain its lease and sublet the premises. The head tenant would then maintain its personal right to break the headlease.

3.        Defective notices

It is an established principle of law that break notices will be strictly construed, meaning that any prescribed requirements about the form or contents of the notice, or method of service must be complied with. In one well known case, the court stated by way of example that where a lease clause specifies that a break notice has to be on blue paper, serving the notice on pink paper will invalidate the break notice, however clear it might have been that the tenant wanted to terminate the lease.

There is however a very limited exception to the general rule. Where there is a minor defect in a break notice it will not invalidate the notice provided that a reasonable recipient with knowledge of the factual and contextual background would not be confused, but would consider this to be an obvious mistake. It is important to note however that this principle will not come into play where an incorrect party has been named or where an original tenant rather than an assignee has been named. In addition, where there are joint tenants, the break notice must clearly communicate to the landlord that all tenants entitled to exercise the break are determining the lease.

4.      What you need to think about

Who is required to serve the notice? Is the break personal to the original tenant or can it be exercised by the current tenant?

  • Check the break date. We would always suggest that you diarise well in advance of when you need to give notice under a break clause. You should also note any specific requirements of the lease in relation to the required method of service for a break notice, so you can take this into account in timing when you send your break notice.
  • Are there any specific pre-conditions to be complied with? You may need to have paid your rent up until the break date or have complied with your repairing obligations under the lease.

Finally, remember that even where a notice has been validly served and pre-conditions have been satisfied before the break date: 

  • The landlord is not obliged to co-operate with a request for confirmation that all the pre-conditions have been satisfied. It is up to the tenant to ensure that this is the case. 
  • A requirement to pay rent up until the break date generally means you will have to pay the whole quarter’s rent even if the break date falls on a quarter day itself. However, the lease may provide that the landlord will refund that proportion of the rent paid from the break date up until the next quarter day.

Further Information

If you decide to exercise your break right we can help. For further information or assistance, please contact Elena Solaro or Debbie Turner at Morgan Russell on 01372 461411.

The data contained within this document is for general information only. No responsibility can be accepted for inaccuracies. Readers are also advised that the law and practice may change from time to time. This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.
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