Break clauses are often incorporated into leases as a way for the tenant and occasionally, but less frequently, the landlord to maintain flexibility. In the present market they are often exercised by tenants. But exercising break rights and even the clauses can cause problems for the unwary tenant and great care must be taken to ensure that the break is exercised successfully – recent caselaw has highlighted some of the potential difficulties.
In this blog, we set out a short checklist of key points to consider when exercising a break. There will often be other things to check which, if incorrect, could affect the validity of the break, but the following are where most of the problems arise:
- Dates in the diary – check and carefully note deadlines for service of notices, as well as the break date itself.
Tip: Note these in a colleague’s diary as well in case of unexpected absences
- Pre-condition pitfalls – review the lease to establish whether there are any pre-conditions to the break and check in particular:
- When they have to be complied with – the date of notice, the date of break, or both?
- Repair – is the break conditional on your handing back the property in full repair? It can be bad news if so – it can’t be guaranteed that the break will be effective as there will often be some minor breach the landlord can use to its advantage. All is not lost, however, as you may be able to negotiate with the landlord as to the state the property is needed to be in before the break is considered effective.
- Reinstatement – do you have an obligation to remove any alterations made? If so, ensure you make the necessary arrangements for removal in good time.
- Vacant possession – even if not expressly set out in the lease, there is an implied obligation to hand the property back with vacant possession. If you have sub-tenants and/or have made alterations to the premises, the position can be complicated and we advise you to seek further guidance as to what is required of you. Our Real Estate Litigation team can assist.
- Identity issues – the identity of the landlord must be carefully checked. Even though it sounds obvious, cases of mistaken service do continue to turn up in the Courts. Whilst much of this process is down to the solicitors carrying out searches at the Land Registry, you should check who it is you pay rent to.
- Neglected notices – once again, it sounds obvious, but the lease clause specifying how notices are to be served must be carefully checked and complied with. This is usually the job of the solicitors.
As you can see, there is a lot of scope for things to go awry in the service of a break notice. Landlords are often driven to challenge such notices – the prize being another five or ten years of the tenant being on the hook. This happens often where the property will be difficult to remarket. Our experience is that landlords will usually look for anything, however small it may seem, which renders the break inoperative.
Given the importance to the tenant of getting it right, we naturally recommend always seeking the advice of your usual Reed Smith lawyer or contacting the authors.
