Landlord and tenant checklist
• What is the special rule for break clauses?
• What if there is an error concerning the break notice?
• Has the break notice been served by the right person?
• Has the break notice been served on the right person?
• Has the break notice been served at the right time?
• Has there been compliance with conditions attached to the break concerning:
(i) vacant possession?
(ii) compliance with lease covenants generally?
(iii) payment of money?
• Can defects in break notices be waived?
• What is the effect of exercise of a break clause?
What is the special rule for break clauses?
A break clause is a clause in a fixed-term lease which entitles one or both of the landlord or the tenant to bring the lease to an end, usually on certain conditions, before the term would otherwise expire.
The special rule for a break clause is that there must be strict compliance with all conditions to which it is expressly subject. This is because a break clause is a type of option – the party with the benefit of the break has the option to bring about an early termination. The strict rules pertaining to the exercise of options (including time being of the essence) apply: if one party is exercising an option against the other, that other party is entitled to know with certainty whether it has been exercised.
What if there is an error concerning the break notice?
There is a critical distinction to be drawn between (i) the formal requirements for the notice as set out in the break clause; and (ii) the question of whether the break notice is effective to convey the information required by the clause: see Procter & Gamble Technical Centres Ltd v Brixton Plc [2002] EWHC 2835 (Ch); [2003] 2 EGLR 24.
There has to be strict compliance with (i) the express, mandatory requirements, such as in relation to time limits: see Reed Personnel Services plc v American Express Ltd [1997] 1 EGLR 229.
However, in relation to (ii), minor defects in the wording of a break notice, where the break clause does not require any particular express wording, it will not necessarily invalidate the notice if the reasonable recipient would not have been misled or confused and would have understood its true meaning: see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; [1997] 1 EGLR 57.
Has the break notice been served by the right person?
Unless there is specific wording in the break clause suggesting that it is personal only to a specific party (such as the named, original tenant), a break clause is exercisable by the party which has the right to exercise it under the lease and all its successors in title: see Aviva Life & Pensions UK Ltd (formerly known as Norwich Union Life & Pensions Ltd) v Linpac Mouldings Ltd [2010] EWCA Civ 395; [2010] PLSCS 112.
The break clause must be served by the party who holds the relevant legal interest in the lease or in the reversion and, where there is more than one landlord or tenant, the break clause must be served by or on behalf of all of them. Service of a break notice by the beneficial owner would not be effective, unless the beneficial owner is properly constituted as the agent of the legal owner.
As long as the reasonable recipient would not be misled or confused, a break notice which was obviously served on behalf of the tenant will be valid even if it mistakenly refers to having been served by a subsidiary company: see Havant International Holdings Ltd v Lionsgate (H) Investment Ltd [1999] PLSCS 275.
Has the break notice been served on the right person?
A break notice cannot be valid if served on the wrong person. A tenant’s break notice served on its original landlord, who had created an intermediate reversionary lease, will not be valid if the lease requires the immediate landlord to be served: see Standard Life Investments Property Holdings Ltd v W&J Linney Ltd [2010] EWHC 480 (Ch); [2010] PLSCS 248.
Has the break notice been served at the right time and in the right way?
In commercial leases, most break
clauses require the service of the break notice and the consequent termination of the lease to occur on or by a specified date.
In those circumstances, it is critically important that the break notice is served on or by the date required. In particular, if the right to break arises by six months’ notice on an anniversary of the term, it will be essential to work out exactly when that anniversary occurs. The precise date will depend on the way that the term is expressed to start, such as whether it begins “on” or “from” the date specified as the commencement of the term of the lease.
If the break clause or the lease as a whole requires a mandatory method of service, that must be complied with for the notice to be effective: see Claire’s Accessories v Kensington High Street Associates LLC [2001] PLSCS 112.
Has there been compliance with conditions attached to the break:
(i) vacant possession?
Where the condition is that the tenant
must give vacant possession, strict compliance with the condition does not mean that the tenant has to leave the premises 100% pristine. That is not a relaxation of, or exception to, the strict compliance rule; it simply follows from
the fact that vacant possession only
means free of people and empty of chattels which substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property: Ibrend Estates BV v NYK Logistics (UK) Ltd [2011] EWCA Civ 683; [2011] 3 EGLR 1.
Has there been compliance with conditions attached to the break:
(ii) compliance with lease covenants generally?
Where the break clause is subject to an absolute condition that all the (tenant’s) covenants in the lease are performed at the termination date, even a minor breach outstanding at that date can lose the tenant the right to break in its entirety: see Bairstow Eves (Securities) Ltd v Ripley [1992] 2 EGLR 47.
However, where the condition attached to the break clause is only that the tenant need “substantially” or “materially” comply with its covenants under the lease, the test will be whether any breach has in fact inhibited the landlord from re-letting or re-selling without delay or expenditure: see Fitzroy House Epworth Street (No 1) Ltd and another v The Financial Times Ltd [2006] EWCA Civ 329; [2006] 2 EGLR 13.
Has there been compliance with conditions attached to the break:
(iii) payment of money?
Where a tenant is required to make a payment of money by a certain date, that payment must be made in full, on time.
A quarter’s payment of rent which falls due before the break date must be paid in full if the lease requires the reserved rent to be paid up to the break date as a condition of the exercise of the break clause, even if the lease will not run for
the entirety of the relevant quarter: see PCE Investors Ltd v Cancer Research UK [2012] EWHC 884 (Ch); [2012] PLSCS 84. The sum overpaid will not normally be recoverable: see Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd and another [2014] EWCA Civ 603; [2014] 2 EGLR 48 (in which case the Supreme Court has granted permission to appeal).
In Avocet Industrial Estates LLP v Merol Ltd and another [2011] EWHC 3422 (Ch); [2012] 1 EGLR 65, the tenant lost its
right to break because historic late payments of quarterly rent had generated about £130 of un-demanded contractual interest, even though, at the time of service of the break notice, neither landlord nor tenant would necessarily have known about the interest.
Can defects in break notices be waived?
They can. All the circumstances are potentially relevant, even after service of the defective notice. In MW Trustees Ltd and others v Telular Corporation [2011] EWHC 104 (Ch); [2011] PLSCS 46, a landlord was estopped from challenging a tenant’s break notice on the ground that it had not been validly served, because it had already accepted the validity of the notice in an e-mail.
What is the effect of exercise of a break clause?
Once served, a break notice cannot be withdrawn unilaterally and, if all the conditions attached to it are satisfied, the lease will end on the date specified in the break clause as its termination date. If it is a headlease which is terminated in this way, any underlease also ends – “the branch falls with the tree” (see Pennell v Payne [1995] 1 EGLR 6).
If the lease is protected under the Landlord and Tenant Act 1954, the end of the contractual term which the exercise of the break clause brings about still leaves the tenant with a statutory tenancy and the right, subject to the usual rights of opposition, to a renewed lease. In that circumstance, all that the break will have done for the landlord is bring forward the point at which the tenant’s right to renew is considered.
Useful resources
Woodfall: Landlord and Tenant, 17.285-17.301 (Sweet & Maxwell)
Hill & Redman’s Law of Landlord & Tenant, chapter 13 A 4202-4208 (Lexis Nexis)
Tom Weekes: Property Notices: Validity and Service (Jordan Publishing)
Mark Warwick and Nicholas Trompeter: Break Clauses (Sweet & Maxwell)
Leading authorities and statutory provisions
Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd and another [2014] EWCA Civ 603; [2014] 2 EGLR 48
Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; [1997] 1 EGLR 57
Aviva Life & Pensions UK Ltd (formerly known as Norwich Union Life & Pensions Ltd) v Linpac Mouldings Ltd [2010] EWCA Civ 395; [2010] PLSCS 112
Procter & Gamble Technical Centres Ltd v Brixton Plc [2002] EWHC 2835 (Ch); [2003] 2 EGLR 24
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