In this era of the grant of shorter and shorter leases, it is also becoming more and more common for commercial property leases of, say 10 years, to contain break clauses allowing tenants to terminate the lease earlier than the expiry date.
There are many catches for the unwary and what appears to be a simple case of serving notice on the landlord is often not and leads to expensive and time consuming litigation.
Break clauses will require notice to be served in a specific manner and within a prescribed timeframe. They can also require certain pre-conditions to be me for the break to be effective, for example payment of rent or other sums, compliance with other obligations in the lease such as carrying out repairs or removal of alterations and the giving of vacant possession on the break date. Any error generally means the tenant has to pay rent for another five years or more, so if the space cannot be re-let quickly, potential errors are probably worth litigation.
A recent case demonstrates the contentious issue which can arise. In Capitol Park Leeds plc v Global Radio Services Ltd [2020] EWHC 2750 (Ch), the tenant had to give six months’ notice of its intention to break and return the premises with vacant possession. Notice was given for a break date on 12 November. The break had a number of conditions attached to it, one of which required the Tenant to 'give vacant possession of the Premises to the Landlord on the relevant Tenant's Break Date'. In an attempt to comply with the break condition, prior to vacating, the Tenant removed the Landlord's fixtures including (amongst other things) ceiling tiles, radiators, heating pipework to serve radiators and office lighting.
The Landlord argued that the Tenant had not complied with the condition as it had not given back 'the Premises' as defined in the lease and as a result, therefore, the lease (and all associated liabilities such as for rent) was continuing. On appeal, the Court found that the intention of the relevant clause was for the Tenant to return the premises free of people, chattels and interests (which it had done). The clause was not concerned with the repair or condition of the property.
Accordingly, the Tenant was successful in demonstrating its exercise of the break clause was effective and the lease had terminated on the break date. The Court ruling meant that the Tenant had effectively been able to leave the property in a dysfunctional and unlettable state, but the Landlord was able to seek compensation for its losses under the lease by claiming damages for terminal dilapidations.
As a tenant you can avoid costly mistakes which could render exercise of the break clause ineffective and as a landlord you can ensure termination is only effective where the strict conditions of the break provisions have been complied with.
It’s important to understand the specific requirements of the break provisions and to plan and take expert advice in advance.
Michael Adamson
Agnieszka Nowak