Commercial tenants often negotiate a one time only right to terminate their lease early on a set date. Having secured this flexibility, if the tenant decides to exercise its break right, it is imperative that:
· the break notice is valid and served correctly; and
· in the case of a conditional break, all conditions have been complied with in full.
The consequences of failing to do so are costly. The lease will not terminate on the break date and, unless the tenant can negotiate a surrender or an assignment of the lease, the tenant will be liable to pay the rent and perform the tenant covenants for the remainder of the term of the lease.
Time limits for the service of the notice, the method of service and all other requirements in the break clause will be construed strictly against the tenant. Landlords, incentivised by not wanting to lose their rental income, often look for reasons to defeat the tenant’s break.
Unsurprisingly, given the high stakes involved, there are a considerable amount of court cases relating to break rights. The case law serves as a sharp reminder that successfully exercising a break right is no mean feat and errors, many of which could have been avoided, are all too easily made.
Common pre-conditions include payment of all annual rent due, delivering up vacant possession and material compliance with all tenant covenants. The true meaning of these obligations is found in case law and there are a number of pitfalls for the unwary. For example, an obligation to have paid all annual rent is an obligation to pay the rent due to the next rent payment date and not just a proportionate amount calculated up to and including the break date.
Tenants are strongly advised to seek professional legal advice when negotiating and when seeking to exercise a break right. The costs of going it alone and getting it wrong are simply too high.
In the words of Lewison LJ in the Court of Appeal “The clear moral is: if you want to avoid expensive litigation, and the possible loss of a valuable right to break, you must pay close attention to all of the requirements of the clause, including the formal requirements, and follow them precisely.”
For more information contact Carly Arthur at Scott Fowler Solicitors on 01604 750506.