The Law Society’s advice to tenants on the subject of break clauses is: “Get one if you can. Try and make sure it is exercisable after a certain date, not only that date – and that it is not conditional on full performance of the lease.” This is because the courts treat options to determine leases in exactly the same way as they treat options to purchase, which means that there must be strict compliance with the conditions attached to break clauses. If not, the decision in Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd [2007] EWCA Civ 7; [2007] PLSCS 12 illustrates some of the difficulties that can ensue.
The tenant exercised its right to terminate a lease and paid the landlord a lump sum to release its liabilities for dilapidations and for reinstatement at the end of the term. The written agreement that recorded the arrangement was made several weeks before the break notice was due to expire and did not refer to the condition in the break clause requiring the tenant to give vacant possession of the premises at the end of the lease. The omission left the door open for the landlord’s subsequent claim that the lease continued in force and effect because the tenant had failed to remove all its property from the premises before the break notice expired.
The majority of the Court of Appeal decided that the parties had agreed – by construction or implication – that the lease would terminate when the break clause expired. The parties had entered into the agreement to crystallise their rights and liabilities, and there was no sensible basis for suggesting that they had agreed that the tenant would pay for a release from its liabilities for reinstatement at the end of the term without also agreeing that the lease was to end when the break notice expired. So, the tenant’s failure to give vacant possession on the due date would, as in the case of normal lease expiry, sound in damages for trespass, and did not invalidate the tenant’s break rights under the lease.
The commercial property industry is expecting the Commercial Leases Working Group, a pan-industry group convened at the government’s request, to publish a new code of practice for commercial leases later this year. The code is not expected to make any provision to cover existing leases containing conditional break clauses, because it operates prospectively – not retrospectively. However, it is speculated that the code will restrict the types of conditions that can, in future, be attached to break clauses in leases under the code. Adherence to its principles will, for the time being at least, remain voluntary, but, if the speculation is correct, it would certainly help to reduce the number of break clause disputes that are contested through the courts.
Allyson Colby is a property law consultant
