Since the COVID pandemic, it has become common for commercial property tenants to seek flexibility in their lease terms, and they no longer want to commit to straight lease terms of, say, ten years.
Very often nowadays, tenants want to include a break clause in their lease to give them flexibility to exit the property early if the business is going well, for example, and they need to expand and go into bigger premises, or perhaps if they find that trading from that particular location has not worked out as they intended and they want to move elsewhere.
It is therefore very common for break clauses to be included in leases when they are granted, giving the tenant the right to end the lease early. It is also possible for a landlord’s break clause to be included in a lease, but this article focuses predominantly on tenant break clauses and the issues that can arise.
Break clauses and common invalidity issues
The most common issues that arise relate to:
- Serving an invalid break notice;
- Not complying with the pre-conditions for serving a valid break clause.
It is essential to seek legal advice when serving a break clause, as this is an area of the law where the Courts have examined numerous cases and determined that, for a break notice to be effective, the precise requirements of a break clause must be complied with.
The consequences of serving an invalid break clause can be potentially devastating for a commercial tenant, and it is therefore essential to seek advice to ensure that a valid break notice is given. In the worst-case scenario, if an invalid break notice is served, the tenant could find that they remain liable to pay the rent and comply with the tenant’s covenants until the end of the lease term. That might be another three or five years in the future.
It is also essential that a tenant understands what preconditions, if any, they must comply with in order to terminate the lease. Pre-conditions are conditions that must be met in addition to serving a valid break notice. Pre-conditions might include a tenant having to pay a break fee penalty when they serve the break notice or by the break date, or a tenant might have to return the property in a particular state and condition.
Nowadays it is common for a tenant to simply have to pay all rents due under the lease up to the break date and to make sure that they give vacant possession of the property back to the landlord, but that is not the case in all leases and in every case the letter of the lease will have to be followed and complied with in order for the lease to end early.
Essential elements of a valid break notice
Please see our article, which details the essential elements of serving a valid break notice.
What are common grounds for invalid break notices?
Common pitfalls include serving the notice on the incorrect landlord party. It is not simply a case of looking at the landlord named on the lease and serving a notice on that party. Care should be taken to verify who is registered as the owner of the property, as well as with HM Land Registry. Additionally, attention should be given to who the rent has been paid to.
Care should be taken regarding the location where a break notice is addressed and sent. Very often, the lease is prescriptive about the address to which a break notice should be sent. If it is sent to the wrong address, even if it is actually received by the landlord at the alternative address, it may invalidate the break clause.
It is also essential to ensure that time periods are complied with. Very often, the lease contains a provision that sets out when a break notice is deemed served if postal methods send it. For example, it might say that if a break notice is sent by first-class post, it is deemed served on the second day after posting. Care, therefore, needs to be taken to ensure that notice is being served in time, taking into account any deemed service provisions, and that sufficient notice is being given.
In addition, if 6 months' notice has to be given, this period of notice must be given. Falling short by a day or more will be fatal.
As mentioned above, it is also essential to ensure that any pre-conditions for breaking the lease early are complied with. Attention should be given to whether conditions must be complied with on the date the notice is served or by the break date itself.
What are the service requirements?
This is largely determined by what is specified in the particular lease. General principles do not apply in the context of serving a break clause. Any requirements outlined in the lease must be strictly followed. In the context of break clauses, there is no room for ambiguity. If the lease states that the break notice must be served on pink paper, then it must be served on pink paper. It is not sufficient to serve a notice on white paper and hope for the best.
What are the pre-conditions for break clause notices?
Again, this depends lease by lease. Common pre-conditions include a specific period of notice to be given to the landlord, or in some cases, a tenant may be required to pay a break penalty, such as six months' rent, in order to terminate the lease.
Care needs to be taken to ascertain whether the pre-conditions need to be complied with at either the date that the break notice is being sent or by the break date itself. It is rare to see nowadays, but there are still leases that contain a clause stating the tenant must materially comply with their lease obligations to break the lease.
This is a very onerous obligation on the part of the tenant, and it should be avoided at all costs. Effectively, a material compliance condition means that the tenant must fully comply with all covenants in the lease, including the obligation to fully repair the property as of the break date.
How can you challenge a break notice?
This is something that a landlord may do if they consider that an insufficient period of notice has been given or perhaps an invalid break notice has been served. In the worst-case scenario, if the landlord challenges the validity of the notice to break, then it may be ineffective, and the lease will continue until the end of the lease term.
Usually, if a landlord intends to challenge a break notice, they will write to the tenant shortly after the break date, asserting that the lease is continuing and requesting that the tenant confirm in writing their acceptance of this position. If the tenant is unwilling to confirm that the lease is continuing, the landlord would have the right to seek a declaration from the Court to that effect.
What can we learn from case law examples?
As mentioned above, break clauses have to be strictly complied with. Care should be taken to make sure that the precise requirements of the break clause are followed. The break notice should be sent to the landlord at the address specified in the lease, and care should be taken to ensure that a sufficient period of notice is provided.
There are numerous cases concerning break clauses that have established that in this commercial lease context, the Court interpret the requirements of break clauses very strictly and is not willing to use its discretion to allow any departure from the requirements in the lease.
What are common tenant responses to invalidity challenges?
A tenant should always take legal advice and instruct a solicitor to prepare and serve a break notice on their behalf. If the landlord then raises any issues, the tenant has the ability to refer back to their legal advisers and ask them why it is being asserted that an invalid break notice has been given.
In instances where tenants have prepared and served break notices themselves, they may not understand why a landlord is challenging the break notice initially, and they should therefore seek early legal advice to clarify their legal position.
It is common for tenants to initially challenge a landlord that asserts that an invalid break notice has been served, but a tenant should only do so with the benefit of legal advice, because failing to understand the true legal position can be disastrous in this context if in fact an invalid notice has been served and the lease is going to continue for another three or five years.
What tactical considerations should a landlord have?
It is very common for a landlord to remain silent when they receive a break notice, even if the tenant requests that they acknowledge receipt of a copy of the break notice. Landlords want to reserve their position even when a break notice has been served, and often want to wait and see whether the tenant will comply with the requirements of the break clause as at the break date, i.e. whether they pay any penalty fee that might be payable and/or whether they fully vacate the property.
In some instances, a landlord will acknowledge receipt of a break notice, but often they also respond to confirm receipt of the notice, while reserving their position on whether the tenant has validly complied with the break clause as of the break date.
It would be very unusual for a landlord to receive a break notice and acknowledge its validity and say at that point that they accept that the tenant’s lease will end on the break date, because they will want to make sure that any conditions of the break clause are complied with before they give any open acknowledgment that the lease will be coming to an end.
What is the Court procedure for break notice disputes?
Either a landlord or a tenant may seek a declaration from the court regarding the validity of the break notice. The Court will then determine whether a valid notice has been served. If it has not, the Court will declare that the lease remains in effect and, therefore, the tenant remains liable to pay rent until the contractual end date of the lease.
Are there financial implications for invalid break clauses?
Yes. The tenant will serve a break notice to bring their lease to an early end and thus avoid paying ongoing rents. If an invalid break notice is served, the tenant will be liable to pay all sums due under the lease until the end of the lease.
How can you prevent break clause disputes?
To avoid a dispute with the landlord, a tenant should always employ a legal adviser to prepare and serve the break notice on their behalf.
What are alternative approaches for settlement?
In some limited circumstances, even if an invalid break notice has been served, a landlord may be willing to reach a commercial settlement to bring the lease to an end early. In such circumstances, a landlord is likely to want the tenant to pay a substantial premium equivalent to a large part of the rent that would be due at the end of the lease, in order to bring the lease to an early end.
This information is for guidance purposes only and does not constitute legal advice. We recommend you seek legal advice before acting on any information given.
