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What is today's blog about?
In this week’s blog, we look at the three key components of break options in commercial leases. This is essential reading for all Commercial Real Estate candidates pursuing the Landlord & Tenant competency.
You can read our introduction to break clauses in a previous blog article. In a future article, we will take a look at conditions precedent and other issues relating to break options.
You can also read more in our Research Paper on break options in our Free Resources. Furthermore, if you want to read the full transcript of any cases mentioned in this article, you can do so by heading to BAILII.
A quick overview of break clauses…
Starting with first principles, break options are purely governed by the terms of the lease, although case law aids interpretation of ambiguous lease wording.
There is no standard form of break clause as the specific wording is agreed between the parties and will reflect their respective negotiating strengths.
Where a break is validly exercised, the lease terminates on the break date and the tenant has no future liability under the lease. A claim for damages may still be made by the landlord in respect of past breaches, however.
There is no unilateral right to withdraw a validly served break notice, although a landlord may waive a validly served notice.
What are the key components of a break clause?
A break clause must incorporate three key components; the break date, the beneficiary and the requirements for service of notice.
When is the break date?
A break option may be exercised on a specified date or on a rolling basis (Adams v Green & Another, 1978 247 EG 49 24), although investors tend to resist the latter as they provide little income security.
Ideally, the lease should expressly state the break date(s), as problems may be encountered with a date calculated by a stated formula as the lease date and term commencement date may differ (Trane (UK) Ltd v Provident Mutual Life Assurance, 1994 EGCS 121).
In respect of the date for giving notice, the Courts are reluctant to hold that notice must be served on a specific date, unless there is an express provision to the contrary that makes time of the essence (Hexstone Holdings Ltd v AHC Westlink Ltd, 2010 EWHC 1280).
Who is the beneficiary of a break option?
The beneficiary is the party who may exercise the break option. This should be expressly stated within the lease. Where the lease is silent, only the tenant may operate the break (Dann v Spurrier, 1803 3 B&P 399 and Fallon v Robins, 1865 16 LRCHR 422).
In the absence of an express provision to the contrary, the beneficiary will be both the original party and any successors in title.
Where a lease is assigned by the original beneficiary, the benefit and burden of a break will pass to the assignee due to the operation of common law and, either, Sections 62 and 142 of the Law of Property Act 1925 (where the lease was granted prior to 1 January 1996, for ‘old’ leases) or Section 3 of the Landlord and Tenant (Covenants) Act 1995 (for ‘new’ leases).
In essence, this precedent means that restructuring a company or an active asset management programme may render a personal break invalid, with subsequent reassignment back to the original tenant not being of assistance.
The well-advised tenant should, therefore, expressly provide for the benefit to break to be transferred in any licence to assign, although this will not be possible if it is a non-transferable personal option.
Specifically, in Norwich Union Life and Pensions v Linpac Mouldings Ltd (2009) EWHC 1602 (Ch), (2010) 1 P & CR 11), it was held that where a break is personal, the tenant should seek to sublet, not assign, as this is likely to retain the personal right to break.
What are the requirements for serving a break notice?
When serving a break notice, two key questions must be considered; ‘what are the requirements of the relevant clause?’ and ‘have those requirements been satisfied?’.
The mechanism for service may be mandatory or permissive. Where it is mandatory, the mechanism must be strictly abided by, following Capital Land Holdings Ltd v Secretary of State for the Environment (1996) SCLR 75.
Interestingly, in Blunden v Frogmore Investments Ltd [2002] 2 EGLR 29, a notice sent by recorded delivery was held to be valid, even though it was later returned in the post. To avoid doubt, it is prudent to instruct a process server to ensure that a notice is validly served.
The service of break notices is governed by Section 196 of the Law of Property Act 1925 (15 & 16 Geo 5, chapter 20). This applies whether it is expressly stated within a lease or where the lease is silent, unless there is express wording to the contrary (Enfield London Borough Council v Devonish, 1997 29 HLR 691).
The Law of Property Act 1925 states that ‘a notice is sufficiently served if it is left at the last-known place of abode or business in the United Kingdom of the lessee, lessor, mortgagee, mortgagor, or other person to be served, or, in case of a notice required or authorised to be served on a lessee or mortgagor, is affixed or left for them on the land or any house or building comprised in the lease or mortgage, or, in case of a mining lease, is left for the lessee at the office or counting-house of the mine’ or ‘if it is sent by post in a registered letter addressed to the lessee, lessor, mortgagee, mortgagor, or other person to be served, by name, at the aforesaid place of abode or business, office, or counting-house, and if that letter is not returned by the postal operator (within the meaning of the Postal Services Act 2000) concerned undelivered; that service shall be deemed to be made at the time at which the registered letter would in the ordinary course be delivered’.
Where the provisions of Section 196 are expressly excluded, common law rules apply whereby a notice is deemed as ‘served only if it has been received by, or if it has come to the attention of, the recipient’ (Holwell Securities Ltd v Hughes,1974 1 WLR 155 and Singer v Trustee of Munro, 1981 1 WLR 1358).
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N.b. Nothing in this article constitutes legal, professional or financial advice.