Will landlords be able to keep tenants on the hook and will leases continue even when tenants try to exercise a break right? In the current state of COVID-19 lockdown it could be more difficult for tenants to effectively break the term of a lease. Can a break right be validly exercised when a tenant cannot access the property to remove its goods and carry out any works necessary to reinstate the space by the break date?
Some break clauses will allow a tenant to walk away as long as they have paid all rents due up to the date of the break. This is within the tenant’s control, if it has the funds to pay, so those breaks will remain effective.
Some break clauses expressly provide that they will only operate if the tenant gives up occupation and terminates any underleases they may have granted. Giving up occupation may at first suggest that it is only people who need to have vacated the property, but it’s not quite that simple and the wording of the clause still needs to be considered carefully. A detailed look at the clause and understanding of the premises will help make it clear whether giving up of occupation relates only to people. A building that the tenant has adapted to fill with masses of bespoke machinery or apparatus might still be said to be occupied, and so there’s a chance that the break won’t be effective if that cannot be removed.
We know there are many break clauses that state that vacant possession has to be given as a condition of the break right. This goes a step further and means that the property must be free of people and possessions. A minimal amount of possessions – the odd piece of furniture, etc – will not prevent this sort of break. The test is: can the landlord possess the property on the break date? That’s why heavily kitted-out and equipped premises may fail the test.
What argument does the tenant have?
Because of previous case law we know that a tenant break right is a form of option and so is interpreted strictly against the tenant exercising it, to the extent that if the clause specifies a notice on blue paper and one is given on pink paper, the break will not have been validly exercised.
There’s a lot of discussion taking place around the concepts of force majeure and frustration of contracts as they might apply to the coronavirus pandemic. Leases in England and Wales rarely, if ever, contain force majeure clauses and so no comfort is to be found there. Frustration is similarly rare in real estate and leases. For frustration to end a contract, the event must be totally unforeseen, and the circumstances must have changed so dramatically since the contract was entered into that it can no longer be performed. The key is that the whole contract must be incapable of performance, not just a specific term and, in the case of a break clause in a lease, there is a very strong argument that the lease can still be performed – it is simply that the obligations under a specific clause cannot be performed. It is hard to see any argument that the break right was the overwhelmingly most important term of the lease so we don’t think that will help tenants.
Landlords are discussing rent payments with their tenants (many of whom are not paying, or not paying in full, now), so they may discuss any upcoming breaks too. Ultimately, if a court is asked to decide whether a break clause was properly operated, the case will be judged on its own merits. While a judge may have more sympathy with a small tenant company than a large corporate enterprise, the legal arguments will be challenging in every case.