Please Note: This Article is 6 years old. This increases the likelihood that some or all of it's content is now outdated.

It is fair to say that landlords dislike tenant-break clauses for their own sake, but are generally accommodating. The tenant’s right to break gives the tenant the best of both worlds. The lease may be terminated before expiry of the contractual term, or the tenant can stay the course. It is suggested that one reason landlords allow the tenant to have the best of both worlds is to overcome the risk of a lower rent on expiry of the short lease contractual term. The upward-only rent review (whereby the rent payable remains unchanged) only applies during the contractual term, not on expiry.  From the landlord’s perspective, a longer term with a break clause includes the prospect that the tenant would not, when the times comes, want to exercise the right to break.

According to the BFP/IPD  “UK Lease Events Review 2014”, an analysis based on circa 90,500 leases,  of the number of new leases granted in 2014, the average term length had increased to an average of 6.8 years, compared to 6.3 years in 2013, but 48.4% of new leases granted in 2014 still had a term of 4 years or less. Assessing the trend is isolation is misleading. 52% of the market comprises leases of 10 years and less, which means that 48% of the market is on longer leases. The commercial property comprises a number of different sectors, and occupier requirements vary according to the sector.  It is more common for office and industrial premises to have break clauses than retail. Higher rents tend to have longer leases because the level of rent generally reflects the importance of the building and/or location to the occupier.  In my experience, (Use Classes A1, A2, A3, A4 and A5) the typical lease for a multiple retailer is 10 years with a break clause at year 5, whereas local traders might be content with 5 years or less. How long a lease is also subject to whether the tenant plans to sell the business as a going concern and necessary for that business to have the particular premises and secure term of lease: bank lending criteria for financing the buying of businesses is likely to require a minimum term of 8 years, a duration that might be at odds with the tenant’s ongoing risk commitment requirement.

From a tenant’s perspective, a break clause provides an escape route in situations where flexibility is required. Whether the escape is allowed or blocked depends upon the wording of the break clause.

A break clause is a type of option entitling a landlord or a tenant to determine a fixed-term tenancy before the fixed term expires by effluxion of time. There are two types of break clause: unconditional and conditional.

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With an unconditional break, all that is required is for the tenant to give whatever period of notice the lease requires and then yield up the premises on the break date.  (A break notice is not a notice to quit. A notice to quit only applies where there is a periodic tenancy.) Whether the premises have to be simply yielded up or yielded up with vacant  possession depends upon the requirements of the lease. In any event, yielding up does not negate the tenant’s obligations for repair and decoration and usually the right to break is stated as being “without prejudice” to the rights and remedies of either party against the other in respect of any antecedent breach.

A conditional break requires the tenant to comply with specified conditions before termination.  The specified conditions vary according to the parties’ bargaining power when the lease was granted. Conditions vary from simple to draconian. An example of a simple condition is the rent to be up-to-date. As with business tenancies, what looks to be simple is not always straightforward. That begs the question at what date is compliance required: the notice date or the break date. The answer depends upon the wording of the lease.

A draconian condition is no breach of covenant. Since most tenants are likely to be in breach of something, the chances of the landlord blocking are high. To overcome the hurdle, the word ‘material’ is included.  What does ‘material’ mean? “The word ‘material’ is susceptible to a number of nuances but what is fair and reasonable between landlord and tenant is not one of them”. Materiality must be assessed by reference to the ability of the landlord to relet or sell the property without delay or additional expenditure” – Fitzroy House (No. 1) Ltd v Financial Times Ltd [2006]

The wording of the tenant’s break clause can affect the rent review. Although a break clause may not be thought anything to do with the rent review, it is in comparison with the evidence. Since comparable evidence should be alike as far as possible in all respects, the conditions of a break clause for the rent review are compared with the conditions of evidential leases. What is reasonably expected in the market at the review/valuation date is integral to the valuation approach. For example, a lease for 10 years without a break clause might result in a lower rent than if the 10 years were subject to break clause. That possibility could be exacerbated in long leases with rent reviews at for example  7, 14 or 21 year intervals where the overage for  the difference between a 5 yearly and 14 yearly intervals (rule of thumb 1% per annum uplift for deviation from the norm) might be undermined by the lack of break clause during the notional term.

Conditional break clauses create problems for tenants, particularly those lacking the financial resources to fight landlord objections. As well as whether the break notice has been worded and served correctly, up to date with rent could include interest on late payment. In Avocet Industrial Estates LLP v Merol Ltd [2011], the tenant, often late with payment, hadn’t provided cleared funds by the break date, also the landlord maintained that there were outstanding charges because the tenant hadn’t paid interest due under the lease for payments of rent that had been paid late in the past, even though no demand had been made for the payment of interest.  The court said that the tenant was able to calculate the interest due without any real practical difficulty. Having regard to the case-law, tenants hoping to take advantage of landlord mistakes is risky. I am advising a tenant where the tenant, up to date with rent according to the landlord’s rent demands, gave notice to break, but overlooked that the rent reviews in the lease were fixed increases which meant that the extra should have been payable by the tenant even though the landlord had forgotten to adjust the rent demands.

What happens to the rent paid in advance of a break date? In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2014], Marks and Spencer had served notices to determine 4 leases, M&S having paid the preceding quaterly rents, approximately £1.1M, then sought a refund after the break date. The landlord refused on the basis that the full quarter’s rent was due on the quarter day, there was no obligation in the leases to refund any sums for periods after the break date. The High Court found in M&S’s favour. but the Court of Appeal overturned the decision. M&S has been granted permission to appeal to the Supreme Court. Pending the outcome, Royal Mail (In Royal Mail Group Ltd v Airport Industrial GP Ltd and another), has made a pre-emptive request to the Court of Appeal for guidance in a dispute with the landlord over the exact requirements of a break option where the break date has not yet arrived.

The message for landlords and tenants is clear. Take nothing for granted. Always read the lease, before assuming the tenant is legally entitled to give up the lease. Due diligence is called for. Merely because the tenant has exercised the break does not mean that at the notice or break date, depending upon the date in the lease, the tenant has complied with any conditions or will have done so on the termination date. If the lease requires the premises yielded up with vacant possession, case law might define vacant posssesion differently to the tenant’s interpretation. It is not necessary for a landlord to serve a schedule of dilapidations before the tenant vacates – a tenant is deemed to know what work is necessary to leave the premises in a state of repair and decoration as envisaged by the lease – so, while a dilapidation schedule is helpful to the tenant it would pay the landlords to have the premises professionally inspected before the tenant vacates for a proper record of what needs doing but not serve it in case the tenant doesn’t comply with the break conditions.

 

Please Note: This Article is 6 years old. This increases the likelihood that some or all of it's content is now outdated.
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