A break clause in a lease can be advantageous to both landlords and tenants. For example, landlords may be looking to redevelop their premises, or they may have obtained interest from a tenant with a stronger covenant which may increase the value of their premises. Tenants, on the other hand, may no longer see the lease as viable, either as they have outgrown the premises or financially, and so may wish to terminate the lease.
There are often conditions attached to a break clause which must be complied with in order to successfully exercise a break. It is unusual that a landlord would be required to adhere to conditions before being able to exercise its break clause. However, if there are any, it must ensure that time limits and obligations are complied with. The most common conditions for tenants to adhere to are as follows:
- All rents due under the lease have been paid;
- All tenant covenants in the lease have been complied with; and
- Vacant possession is provided on the break date.
DTM Legal considers each of these conditions and explains what you should be aware of.
Payment of rent
This condition often only relates to annual rent payable, but may also include any payments reserved as rent under the lease, such as insurance rent or service charge. Following Avocet Industrial Estates LLP v Merol Ltd and another [2011] EWHC 3422, rent may also include interest on late payments of rent.
In order to avoid uncertainty as to whether this condition has been satisfied, tenants would be advised to approach their landlord in advance to determine what payments, if any, are due, and arrange for those to be paid in good time, prior to the break date. However, tenants need to bear in mind that following the decision in Marks & Spencer Plc v BNP Paribas Securities Services Trust Co Ltd [2015] UKSC 72, any payments made relating to a period beyond the break date will only be repayable to the tenant if the lease contains an express clause to this effect.
Compliance with lease covenants
Where a break clause contains a condition which provides that the tenant’s covenants in the lease have been complied with, tenants must be minded, throughout the term of the lease, to ensure they comply with these covenants, as the landlord may dispute that the break is valid if covenants have not been complied with.
Vacant possession
This condition is perhaps the most controversial as it is not until after the break date that a landlord is able to determine whether vacant possession has been delivered. A landlord may be particularly concerned about this condition, either when seeking to redevelop, as they will not wish to incur the additional time and costs associated with removing items left by the tenant before being able to start renovations, or if they have no alternative occupier and the landlord wishes for the tenant to remain.
Following the decision in NYK Logistics Ltd v Ibrend Estates [2011] EWCA 683, it was established that if chattels are left at the premises then vacant possession has not been provided. However, in the recent case of Riverside Park Limited v NHS Property Services Limited [2016] EWHC 1313 the High Court specifically looked at fixtures. In particular, the courts will consider the degree and purpose of the annexation of the item in question and whether it interferes with the landlord’s right to possess the premises. In Riverside the items were a number of non-structural demountable partitioning’s which did not afford lasting improvement to the premises. As these were not fixed to the structure of the premises, their layout was specific to the tenant’s use, and they interfered with the landlord’s right of possession, the court held that they were chattels, and as they had not been removed by the break date, vacant possession had not been given.
Tenants seeking to exercise a break who have also made alterations to the premises during the term of the lease should, in the first instance review the lease and any licence for alterations in respect of the works, and determine whether they are required to reinstate the premises. If this is the case, it would be prudent to arrange for the items installed to be removed promptly, and prior to the break date. If the lease and any licence are silent on this point, tenants should assess the items based on the decision in Riverside and seek to remove those which would fall foul of the characteristics noted by the High Court. It would also be sensible for tenants to approach their landlord prior to the break date to confirm the landlord is happy with the items that are being removed.
Summary
Compliance with break conditions continues to be a developing area, particularly in relation to the meaning of vacant possession. Even where a landlord is agreeable to the break being exercised, it is still in a landlord’s best interests for the above conditions to be complied with. Following HB Property Developments Ltd v Secretary of State for the Environment, Transport and the Regions [1998] L&TR 238, landlords should also be careful not to act in a manner which may amount to a waiver of the right to enforce any of the conditions of the break clause. For example, if keys are accepted from the tenant, the landlord should only accept these expressly on a without prejudice basis to ensure the conditions must still be complied with by the tenant.
From a tenant’s point of view, an early consideration of the conditions attached to the break clause and what is exactly required, as well as an open approach with the landlord, would allow the conditions to be dealt with in a timely manner, before the break date, to ensure there is as little dispute as possible.
DTM Legal‘s Commercial Property team are here to help you with any concerns you may have. Contact Sally Pilott on 01244 354809 or e-mail sally.pilott@dtmlegal.com.
