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Tenant’s Break Rights – Pitfalls for the unwary

Commercial Property

In these challenging times, commercial tenants and their landlords are both looking closely at tenant break rights in their leases. With many businesses rethinking office and commercial space requirements, tenants with an eye to an early exit from unwanted space and landlords keen to avoid empty space in an uncertain market are reviewing their options. It is a timely reminder that, unless tenants are careful, there is a danger they could lose their break right or find it is capable of frustration.

Will Stokes, Associate Solicitor in Hegarty Solicitors’ Commercial Property team discusses break clauses in commercial leases.

Time is of the essence.

The first point to note is that time will be “of the essence” in respect of any time limits in a break clause. Failure to properly serve notice within the correct period could mean, where it is a one-off break, that a tenant loses the right altogether and is tied in for the remainder of the term.

Tenants must, however, also exercise caution due to landlords frequently attaching pre-conditions to break rights which are required to be satisfied before the break can be validly exercised.  Any such conditions must be strictly complied with. Depending on their wording, they may prove very difficult, if not impossible, to comply with.  It is for this reason that the Code for Leasing Business Premises in England and Wales 2020, which though not binding does reflect good practice, recommends the only pre-conditions should be that the tenant has paid the annual rent and gives up occupation leaving behind no continuing subleases.

What issues arise with the most common pre-conditions?

Clauses commonly require a tenant to have paid all “rents and other payments due” under a lease.  This would include insurance costs, service charges and any other payments that may fall due.  The problem with extending the condition to sums other than annual rent is that these further sums are usually variable, often payable on demand and could well be disputed.  A tenant presented with, for example, a supplemental service charge invoice on the day before the break, even if for a nominal sum or one that is disputed, would still have to ensure it is paid, otherwise, the break may be frustrated.

Tenants should also know that a condition requiring payment of all sums due “as at the break date” will include all sums due in respect of the remainder of the payment period in which the break date falls. So, for example, the annual rent for the whole of the quarter will need to have been paid even if the break date happens to be on the first day of the quarter. A failure to do so would invalidate the break.

Another not uncommon condition is that the tenant must have performed all its lease covenants.  Such a pre-condition is virtually impossible to comply with as inevitably there will always be a subsisting breach, however minor, of one of the tenant covenants, for example relating to repair.  Landlords sometimes offer to water this down to refer to “substantial” or “material” compliance, but this is still not satisfactory from a tenant’s perspective as it can just lead to arguments and uncertainty as to what is or is not “material”.

The last condition frequently encountered is that the tenant must give up vacant possession.  The issue here is what will or will not amount to vacant possession. Although the tenant vacates, it may leave behind items which mean that vacant possession has not technically been given. The Courts have, for example, held, where a tenant failed to remove its internal partitioning, that the landlord’s rights of possession were substantially interfered with and so the tenant’s break was ineffective.

In light of this, the best advice is only to accept a condition which requires the tenant to give up occupation and leave the premises free of third-party occupiers.

Finally, tenants should also note that, unless a lease expressly states otherwise, the landlord is not obliged to refund any sums paid in advance for the period beyond the break date. A tenant who has had to pay the full quarter’s rent to ensure compliance with the break conditions will not be entitled to a reimbursement unless the lease expressly obliges the landlord to do so.

For further advice regarding commercial leases and tenant’s break rights, please contact Hegarty Solicitors Commercial Property team at propertycommercial@hegarty.co.uk, or call 01733 346 333.

 

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