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What is today's blog about?
This blog article will focus on break clauses - what are they and why can they be so contentious? Essential reading for RICS APC and AssocRICS candidates.
You can also listen to our CPD podcast on Anchor for more free AssocRICS and RICS APC training and support.
Relevant RICS APC competencies
Landlord & Tenant
Leasing & Letting
Valuation
Why is this relevant?
Windeyer J, in Burrell v Cameron (1977) said, 'in the sphere of options it is a cold, hard world'. Taking the wrong action or advice in relation to a break clause can lead to substantial cost & time implications.
What is a break clause?
A break clause, or option to determine, entitles a landlord or tenant to unilaterally determine a fixed-term lease before the fixed term expires by the effluxion of time.
We will primarily cover tenant break clauses, rather than landlord's development break clauses, in this blog. Effectively, this means that either/both parties can terminate the lease prior to expiry - depending on the terms of the break clause.
Where validly exercised, a lease will terminate on the break date and the tenant will have no future liability. Generally a claim for damages may be made by the landlord in respect of past breaches - this is usually explicitly reserved by the break clause.
Why are they contentious?
Break clauses are generally very black and white - getting it wrong often leads to a lease continuing until expiry with the associated cost implications. Recent caselaw has unsuccessfully tested the status quo, which tends to favour the position of the landlord.
The biggest issue is the opposing interests of the parties; tenants want flexibility to react to market conditions and changing operational requirements, whilst landlords are likely to wish to frustrate breaks to avoid being left with vacant property.
Another key issue is market conditions; if the landlord thinks they can relet on better terms then the leverage of the tenant may be lost.
What governs break clauses?
The lease, although there is no standard form of break clause which can make interpretation tricky
Caselaw, which aids interpretation
There is no directly relevant legislation
What are the key components of a break clause?
Break date - when will the lease terminate? This can be specified in the clause or sometimes calculated by way of a formula. The former is preferred as there is no room for confusion
Beneficiary - who can exercise the option? Make sure it is the party permitted to by the lease (Hexstone v AHC Westlink, 2010). If the break is personal to a named tenant, assigning the lease to another party and then back to the original tenant may render the break invalid (Linpac v Aviva, 2010)
Requirements for service of notice - what are they and have they been satisfied?
How do I serve notice?
Section 196 of the Law of Property Act 1925 applies in relation to service of notice, unless there is express wording to the contrary. Essentially, leave the notice at the last-known place of abode in the UK. Ideally use recorded delivery and keep proof of postage - email is often insufficient.
What is conditionality?
Conditions precedent are what you are required to do in order to operate the break successfully, e.g. give vacant possession, pay all sums due under the lease.
The most favourable break options are unconditional, i.e. there are no requirements!
The Code for Leasing Business Premises in England and Wales 2007 can provide a fallback position, i.e. 'the only pre-conditions to tenants exercising any break clauses should be that they are up to date with the main rent, give up occupation and leave behind no continuing subleases. Disputes about the state of the premises, or what has been left behind or removed, should be settled later (like with normal lease expiry)'.
What is strict and modified compliance?
Compliance can be strict or modified:
Strict - do exactly what is required of you by the break conditions (United Scientific Holdings v Burnley Borough Council, 1978)
Modified - there may be some flexibility in compliance, e.g. reasonable, material and substantial compliance
In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd (1997), the Judge stated that 'if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease’.
This shows the important of strict compliance where required, even where a condition defeats the commercial objective of a break clause. Tenants can easily and trivially forfeit their right to break.
Modified compliance can temper the effect of strict compliance, but the wording can be very subjective and open to interpretation. There is a health warning here - do too much, not too little.
The Courts tend to be reluctant to alter the intentions of a commercial agreement, even if the results are contrary to business common sense. This means that they will typically not make a good bargain good.
Typical conditions
Subsisting breach of covenant (Bairstow Eves v Ripley, 1992) - if there is an absolute condition to perform the tenant's covenants, then make sure that this is followed. In this case, the tenant was required to undertake decoration works at a specific date. They undertook the works too early and the break was invalidated, even though there was no material difference in the standard of works
ayment of rent and other sums (Avocet v Merol, 2011) - in this case, the break was not exercised validly as the tenant had no paid all sums due, including £130 of penal interest which was not demanded by the landlord. The lease continued for a further 5 years at significant cost
Rent apportionment (PCE Investors v Cancer Research, 2010) (M&S v BNP Paribas, 2016) - both of these cases confirmed the position that unless there is an express apportionment clause (i.e. to allow a refund of rent for a partial period after the break date), then the tenant must pay the period in full and will not be entitled to a refund
Vacant possession (Riverside Park Ltd v NHS Property Services Ltd, 2016) - there is no legal definition of vacant possession. In this case, the tenant left behind large amounts of partitioning, kitchen units, window blinds, floor coverings, intruder alarm and water stand pipes which invalidated the break as vacant possession was not given
10 tips for success
Take early advice from a lawyer and surveyor
Keep an audit trail, e.g. file notes, proof of postage
Try to negotiate unconditional breaks in new leases
Ensure strict compliance where required
Do more, not less - even if modified compliance is required, do as much as you can to ensure the break is validly operated
If there is no explicit refund provision, pay the full period's rent
Request written confirmation from the landlord that the break has been exercised validly
Keep an event diary and review it frequently
Request a schedule of dilapidations in advance and agree steps for compliance in writing
Make contractors aware of strict timescales for stripping out works
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N.b. Nothing in this article constitutes legal or financial advice.