There is considerable commentary on break clauses, following numerous cases over the years. The key issues are (a) ensuring that break clauses are clearly drafted such that they can be validly exercised, (b) ensuring that the break notice is served properly and (c) complying with any pre-conditions to the break.
Failure to deal with any of these points can leave you bound by the terms of a Lease and paying rent for the rest of the term or until the next break date (if there is one).
In terms of complying with the pre-conditions of the break clause, the words ‘vacant possession’ are commonly seen in Leases, particularly if granted a number of years ago. The presence of these words can have disastrous consequences, if they are not taken seriously.
In Riverside Park Limited v NHS Property Services Limited [2016] EWHC 1313 (Ch), there was a break clause conditional on vacant possession being given at the time that the break purported to take effect. The High Court held that failure to remove internal demountable partitioning within the property amounted to a failure to give vacant possession which was a condition of the break clause being effective.
The internal partitioning constituted tenant alterations which had been undertaken during the term of the Lease. It was held that the internal partitioning amounted to ‘chattels’ and not part of the property. The partitioning was merely attached to the raised floor and suspended ceiling with screws and was not attached to the structure of the building.
The partitioning could easily be removed. As the tenant had not removed the partitioning, on the facts, the landlord could not, on the purported break date, make immediate use of the property. The court found that vacant possession had not been given and therefore the break was ineffective.
This was also a case where the Lease had been assigned. It serves as a reminder to ensure that when taking an assignment of an existing Lease, you are fully aware of any works and any Licence for Alterations of any previous tenant. There will usually be an obligation to return the property to their original condition at the end of the term of the Lease or sooner termination. You need to be fully aware of the extent of your reinstatement obligations, particularly in the context of valid exercise of a break clause. Failure to reinstate could lead to the break clause being ineffective.
A final warning is that you have to ensure that there is a provision in the break clause permitting a refund of any rent (and on account service charge payments) that have effectively been overpaid at the time that the break takes place. In the absence of specific wording to this effect, no such overpayments are repayable by the landlord.
An example of this problem, where no appropriate provision is made in the Lease, is as follows. The Lease provided, quite understandably, a precondition that for the break to be effective, the rent payment needed to be up-to-date on the break date itself. The rent date was, quite typically, 24th June and the break date, unfortunately, was 30th June. The specific wording was not in the Lease.
The tenant was obliged, in order validly to exercise the break, to pay rent for the quarter commencing 24th June, on or before 24th June. He duly paid the rent. The Lease came to an end on 30th June.
The tenant asked for a refund of the rent for the period from 1st July to 28 September, nearly a quarter of the annual rent. The landlord told him to take a running jump and that the tenant had no legal right to a refund.
The landlord was right, though arguably, a claim lies against the tenant’s solicitor in negligence for agreeing to a defective break clause.
Break conditions must be strictly complied with.
Our approach: we will always advise a client to seek advice on serving a break notice well in advance of the notice period (which is usually 6 months but could be more or less).
The Lease and Licence for Alterations should be reviewed from cover to cover, with a view to advising on any potential pitfalls or risks early on.
Even interest on arrears of rent that has not been demanded by the landlord could make a break notice ineffective. We have previously advised a client to make an overpayment to the landlord to cover this possible interest where they knew the rent had been paid late on a couple of occasions and the Lease contained a condition where this was problematic.
These sorts of problems are generally avoided at the time of negotiating the break clause which would form part of the new Lease. This is not always possible, for example on an assignment, where the landlord is super powerful and super unreasonable or where legal advice had not been obtained when the Lease was granted.
Sarah Beney, Solicitor, Abrahams Dresden LLP
Abrahams Dresden articles and guidance notes are for general information purposes only and generally state the law as at the date of publication. The information may not be relied upon as legal advice. We are of course always happy to advise directly on specific issues arising.