Most landlords’ break rights are linked to redevelopment, but there may be other triggers. The landlord may require a break clause to enable it to occupy the premises itself, should it wish to do so, or to facilitate a future sale.
In HFI Farnborough LLP v Park Garage Group plc [2012] EWHC 3577 (Ch), the landlord sought to terminate the leases of four petrol station sites in order to let them to another tenant. It is not clear from the judgment, but it would appear that the leases had been contracted out of and that the tenant did not have any security of tenure under the Landlord and Tenant Act 1954. Consequently, its ability to continue trading from the properties turned on the validity of the break notices.
The landlord had assured the tenant that it had no intention of terminating the leases unless it stood to make a tidy profit from a sale. Unfortunately, the leases did not spell this out, although they did prohibit the landlord from exercising its break rights unless “the value of the Premises on the date the Break Clause is exercised exceeds the Price”. The leases also contained an overage provision requiring the landlord to pay the tenant 25% of any profits made on sale. Importantly, the expression “overage” was defined as meaning “(New Price – Price) – the Sale Costs] x 25%. The price was the price that the landlord had paid to acquire the freehold and the new price was defined as meaning the sale price of the premises.
The tenant claimed that the landlord was not entitled to exercise the break clause because the properties were not being sold. However, the landlord claimed that the leases contemplated two entirely separate events: the service of the break notices, which was dependent on appropriate valuations, and the sale of the premises. It also claimed that it was not obliged to pay any overage until the premises were sold.
The judge preferred the tenant’s interpretation of the leases. It made more sense, from a commercial point of view, to link the fetter on the exercise of the landlord’s break rights with the obligation to pay overage, which must have been included to compensate the tenant for the loss of its leases. If the landlord’s interpretation was correct, the overage might not be paid for many years, or at all, and the amount payable would bear no relation to the value of the premises when the break clauses were exercised. Therefore, the break clauses were to be interpreted as being exercisable only if the price on a sale exceeded the price that the landlord had paid to acquire the properties.
Alternatively, the judge would have rectified the leases to reflect the construction that he had placed upon them on the ground that the parties had reached a prior accord, which was not recorded in the leases.
The litigation highlights the importance of checking break clauses carefully to ensure that they spell out the precise circumstances in which break rights can be exercised. It would also be advisable to stipulate whether the landlord must satisfy any requirements at the time of service of the break notice or on the date on which the lease is due to determine.
Allyson Colby, property law consultant
