The impact of the pandemic on commercial leases is already well documented and, as the crisis has deepened in recent months, the effect on the retail and hospitality sectors in particular is looking grim. With the initial lockdown starting just before the March 2020 quarter day, many tenants now owe a full year’s rent.
The government’s legislative interventions restricting landlords’ remedies for non-payment are expected to end on 31 March 2021, such that the whole dynamic of the landlord/tenant relationship is going to come under the spotlight with both parties looking for leverage to protect their overall business interests. Fearing empty units, landlords are perhaps less likely to forfeit leases than to try to hold tenants to their lease commitments, whereas tenants will be trying to get out of their leases wherever possible. Enter stage left: the break option.
What is a break option?
A break option is a contractual right for one party (here we look at the tenant’s right) to terminate the lease early. The option often gives a one-off opportunity to break the lease on a specified date and is usually subject to satisfaction of specified conditions.
Breaking up is hard to do: but why?
Break conditions are construed strictly and must be satisfied to ensure the break is effective, otherwise the break fails and the lease continues. It is useful to remember these words, from Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd [2007] EWCA Civ 7; [2007] PLSCS 12, per Lloyd LJ: “In general, conditions attached to a break clause… must be strictly complied with, so that even a day’s delay in giving vacant possession or shortfall in the payment of rent of a few pounds would be fatal.”
If a landlord is keen to keep the tenant, it will scrutinise the tenant’s performance in the hope of finding a defect. Typical break conditions (and issues that arise) include the following:
Break notice
A tenant is normally required to serve written notice on the landlord of its intention to terminate the lease.
Ascertaining the correct break date and the length of notice required is the first step when considering the exercise of a break notice and, depending on the drafting of the lease, is not always straightforward. If a tenant is too late to give the minimum required notice, the option will not be exercisable (even if the break date is many months away).
Identification of the current legal landlord, and its address for service, is also critical, as is establishing the method(s) of service – which should be dictated by the notices provision in the lease. If the service method is mandatory, it cannot be circumvented even if the landlord actually receives the break notice another way (eg, email).
No arrears
As with all break conditions, the specific requirements in the lease regarding payments to be made by the break date (or sometimes when the notice is served) must be followed carefully, including where a break premium is required. Some principles from the case law include:
- When a break date is between rent payment days and rent is payable quarterly in advance, the tenant must pay the full quarter’s rent and will only be able to recover the “overpayment” if the lease expressly allows for that.
- If all sums due under the lease must be paid up to date, this will include service charge and insurance payments. If interest falls due on late rent automatically, any interest owed for the historic late payments must also be paid.
Vacant possession
The requirement to hand back vacant possession is a common break condition, and recent case law has been fairly consistent that this means a tenant needs to give back the premises free from people, chattels and other legal interests. The question to be asked is whether after the break, the landlord can assume and enjoy immediate and exclusive possession, occupation and control of the property.
Even relatively insignificant chattels left at the premises can fall foul of this requirement, such as in Secretary of State for Communities and Local Government v South Essex College of Further and Higher Education [2016] PLSCS 249, where the tenant left freestanding partitioning, computer screens, photocopier, box of files, cabling, etc which was found to be a failure to give up vacant possession.
Unless there is also a condition that there must be no breach of the repairing covenant, a tenant trying to yield up vacant possession should focus on that, as dilapidations can be dealt with by way of a damages payment after the break. Tenants trying to finish repair work have been caught out here – see Ibrend Estates BV v NYK Logistics (UK) Ltd [2011] EWCA Civ 683; [2011] 3 EGLR 1.
A different issue around this condition arose last year in Capitol Park Leeds plc v Global Radio Services Ltd [2020] EWHC 2750 (Ch); [2020] EGLR 38. The definition of the premises in the lease included “all fixtures and fittings at the Premises whenever fixed, except those which are generally regarded as tenant’s trade fixtures and fittings, and all additions and improvements made to the Premises…” and the question was whether the tenant had given up vacant possession of the “premises” because, prior to the break date, and in trying to limit its dilapidations liability, the tenant removed many of the fixtures at the premises, including ceiling tiles, pipework, radiators, and cables, and failed to replace them before the break date. Instead of an argument around what had been left at the property, this was an argument about whether the defined premises had been handed back. The court agreed with the landlord that “the premises” included landlord’s fixtures and fittings which the tenant had removed, and, as such, the break had not been exercised and the lease would continue.
Full compliance with the lease
Occasionally a break option requires the tenant to be in full compliance with all the tenant’s covenants in the lease, including the covenant to keep in repair and to decorate. For these unfortunate tenants, even trifling disrepairs have been found to invalidate attempts to exercise a break.
There may be some ways to get around tiny imperfections, for example, where the conditionality is diluted by words such as “material” or “substantial”, or the repairing covenant itself requires “good and substantial” state of repair. However, this condition can be very difficult (even close to impossible) to satisfy. Even where the landlord is willing to engage early and agree to sign off on the specification of remedial works in advance, there is no guarantee that fault won’t be found at the last moment when it is too late for the tenant to resolve. A tenant is often well advised to pay over the odds for a surrender instead of relying on a fully conditional break option.
Practical tips for tenants
- Ensure that an experienced property litigation solicitor deals with the notice requirements – there may be a little “wriggle-room” around the most minor defects (Mannai principle) but you should aim for perfection as an invalid notice (or service) will mean that the break falls at the first hurdle
- Pay any break premium in good time and in cleared funds
- Check that the full quarter’s rent has been paid
- Check whether any historic payments were late and interest could be due (if you’re not sure, pay an extra lump sum to cover any possible unpaid interest)
- Instruct solicitors to conduct a forensic examination of all the tenant’s covenants within a lease so as to ensure that the scope for a landlord arguing that break conditions have not been satisfied is reduced as far as possible
- Be conservative. If there is doubt as to whether, for example, a payment is or is not required, it is preferable to make the payment, ensure that the break takes effect, and then argue with the landlord afterwards that the landlord is under a duty to return the monies in question
- Write to the landlord saying you believe you have satisfied all the conditions, asking them to let you know if otherwise – you might set up an estoppel argument
For a fully conditional break option:
- get a professional team on board early;
- engage a building surveyor early to provide an assessment of what works must be carried out and to open discussions with the landlord about those works;
- prepare a comprehensive photographic schedule of condition; and
- consider negotiating a surrender as an alternative.
Five other key cases
- On construction of the break conditions: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 1 EGLR 57
- On the payment condition: Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] EGLR 8
- On paying interest, and estoppel arguments: Avocet Industrial Estates LLP v Merol Ltd and Tudor Rose International Ltd [2011] EWHC 3422 (Ch); [2012] 1 EGLR 65
- On the vacant possession conditionRiverside Park Ltd v NHS Property Services Ltd [2016] EWHC 1313 (Ch); [2016] PLSCS 22
- On the full compliance condition: Finch v Underwood [1876] 2 Ch D 310
Three key takeaways
1. Read the lease – not just the break clause but the definitions, notice provisions and so on – breaks are all about the actual words used so don’t assume anything
2. Err on the side of caution when trying to satisfy the conditions
3. Instruct professionals – the risk of failing to exercise the break option is usually many more years liable for an unwanted property
Helena Davies is a property litigation partner at Brabners
