What should parties consider when seeking to exercise a break?

How do you ensure that you give vacant possession?

What is the effect of a break on sub-tenants?

Date published

16 November 2020

Break notices: ensuring that the break is validly exercised

Transcription

Alexandra Holsgrove Jones:

Welcome to another of our TLT Taster sessions for current issues affecting the real estate sector. We've mentioned break options in a couple of other sessions, and today we're going to be looking at them in a little bit more detail. I'm Alexandra Holsgrove-Jones, senior professional support lawyer in TLT'S real estate group, and I'm joined by Emma Cork, legal director in TLT's property litigation team. Emma, we often see break clauses in commercial leases and commonly you'll have a tenant's option to break to create an opportunity to get out of its obligations under the lease partway through the term. It provides the tenant with a guaranteed exit strategy that isn't dependent on the landlord's consent for subletting or assignment or to the landlord agreeing to a surrender.

Alexandra Holsgrove Jones:

Sometimes a lease will contain a break option for a landlord, particularly if the landlord envisages redeveloping the property during the term of the lease and wants to be able to obtain vacant procession. Cases about break options frequently come before the courts. Emma, what should parties be looking at when seeking to exercise a break?

Emma Cork:

First, what does the lease say in relation to the exercise of a break? When does it need to be served, and on whom? Are there any conditions that need to be satisfied for the break to be effective, either at the point that you serve the break notice or by the break date? It's critical that any conditions are strictly complied with. In the case of a tenant's break right, the conditions usually include serving notice on the landlord, paying rents up to date, and possibly giving vacant possession. Additional conditions may require the payment of a sum by way of compensation or material compliance with the lease terms. There may be other special conditions, and the lease needs to be carefully checked for these.

Alexandra Holsgrove Jones:

Even where we're only looking at the basic conditions that notice be served on the landlord, rents paid up to date, and vacant possession be given, problems can arise, can't they?

Emma Cork:

Yes, that's right. In relation to the service of the notice, the tenant must check that it's serving on the legal owner of the property. There may be doubt about this if the property has just been sold and the registration is going through at the land registry. This is something that the lawyers advising the tenant will need to check. Timing of service is also key. When is the break date, and how much notice must be given? Is it a rolling break, or is it a one-off opportunity for the tenant? How must it be served, and what needs to be set out in the break notice?

Alexandra Holsgrove Jones:

What about the requirement to pay rent up to date?

Emma Cork:

Even this isn't always a simple condition to meet. If the rents that have to be paid up to date include insurance rent or service charge, these can be difficult to calculate, although I generally expect a tenant to be invoiced. Our advice is always to err on the side of caution. Depending on the circumstances, it may mean overpaying to ensure that the break is effective. While this may involve a tenant paying more than it may need to, it's likely to be far more expensive if the break is not effectively exercised by the tenant, and it has to stay tied to its lease obligations until the end of the term.

Alexandra Holsgrove Jones:

Most leases require that rent is paid quarterly in advance. How much would a tenant has to pay if the break date fell partway through a quarter?

Emma Cork:

This is an important point and one which the Supreme Court considered in the 2015 Marks and Spencer's case. Where the rent has to be paid up to date for the break to be effective, it means that the whole quarter's rent has to be paid because this contractually falls due before the break date. The key point to note is there'll be no entitlement to a refund of rent paid in advance in respect to a period after the break date unless that's expressly set out in the lease.

Alexandra Holsgrove Jones:

If the tenant has complied with the requirement to serve notice on the landlord and has paid the rent to date, what about the obligation to give vacant possession? Surely that's a fairly easy thing to satisfy.

Emma Cork:

Not always. Vacant possession has a particular meaning and has been subject to a number of court cases over the years. It's not sometimes straightforward to apply. The difficulty can be knowing exactly what needs to be removed from the premises, and disputes can arise where items have been left behind. For example, in the 2016 Riverside Park case, the court decided that the tenant had not given up vacant possession because it had left behind internal partitioning when it vacated the premises. The lease code 2020 doesn't refer to vacant possession as a break condition, but to giving up occupation and leaving behind no subtenants. However, if you're using these sorts of conditions, the lease should define what's meant by giving up occupation because there's less clarity in this concept.

Alexandra Holsgrove Jones:

From what you say, it's really clear that it's vital to get advice before serving a break date.

Emma Cork:

Absolutely. It's really important to get that advice in sufficient time so that the right to serve a break notice under the lease isn't missed. If a break isn't served in the right way on the right person at the right time with the relevant conditions having been fulfilled, the tenant can find itself paying rent for years for premises that they wanted to vacate.

Alexandra Holsgrove Jones:

Okay, so just a couple of final points. Firstly, what is the impact of a break option being exercised on a subtenant?

Emma Cork:

Okay. If a break is validly exercised in a head lease, any sublease will also end, and that's the position whether the break is exercised by the landlord or by the tenant.

Alexandra Holsgrove Jones:

Finally, what if the tenant has a lease with security of tenure under the Landlord and Tenant Act of 1954? Does that render any rights for the landlord to break during the term ineffective because the tenant has security of tenure?

Emma Cork:

A protected lease can still have a break option. If the tenant has a break option, it just needs to serve its break notice and comply with the conditions in the break clause as we've been discussing. However, if as you've said, it's a break right for the landlord, things are a bit more complicated. The lease can still contain a landlord's break right, but a protected lease can only be terminated in accordance with the provisions of the Landlord and Tenant of 1954. This means that although the break notice will end contractual lease in accordance with the terms of it, a statutory tendency under the 1954 Act will come into effect when the contractual lease ends. Therefore the landlord will also need to serve a section 25 notice on the tenant to end this statutory tenancy. This notice will need to specify at least one of the grounds of opposition under the act that the landlord intends to rely on.

Alexandra Holsgrove Jones:

Thanks, Emma. It seems that compliance with break options can be fraught with difficulties, and it is essential to get legal advice before exercising a break. Thank you for joining us. If you have any questions on the issues rates, please get in touch. You can also sign up for other TLT Taster sessions.

 

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