Breaking up is Hard to Do
No doubt a sign of the times, over the last couple of years there have been a raft of cases in which landlords have challenged the effectiveness of a tenant’s attempt to break, that is, to terminate a lease before the end of the fixed term.
The validity or non validity of a break can have huge repercussions for both landlords and tenants. For tenants, it is therefore immensely important to get it right, otherwise they are stuck with a lease that they do not want. For landlords, and their managing agents, it is equally important to be able to spot the occasions when the tenant has got it wrong, and to know what to do to preserve the landlord’s ability to challenge the validity of the break.
Commonly, the contractual provisions in a lease allowing a tenant to break a lease early will impose conditions on that right, such as that the rent and all other sums must be paid in full, or that the tenant must be in compliance with all covenants in the lease as at the break date. The lease will also often provide that the lease can only be terminated on a specific date, by the tenant serving not less than so many months notice on the landlord.
Historically, courts have and still do interpret those requirements strictly and therefore tenants can find, for example, that even by serving their notice 1 day late, they have lost the right to break the lease entirely.
A few relatively recent examples of the pitfalls that have caught a tenant out are:
- Serving the notice on the wrong person – for example, a break notice was invalid because the lease required notice to be given to the landlord and the landlord’s property manager, and the tenant only served notice on the landlord. Other problems can arise where the landlord has changed and the tenant serves notice on the previous landlord.
- Failing to comply with the conditions of the break, such as:
- Not giving vacant possession on termination of the lease – for example, where the tenant decided to carry out works identified in the landlord’s schedule of dilapidations served a few days before the break date. The tenant had contractors on the premises carrying out the works for 6 days after the break date and this meant that it had failed to give vacant possession and the break was invalid.
- Not having paid the rent in full prior to the break date – this is a very easy trap for a tenant to fall into. If the rent is paid quarterly in advance, the tenant usually has to have paid for the entire quarter, even if the break date falls between two quarter days. It cannot usually apportion the rent for the period up to the break date.
- Not having paid other sums due in full prior to the break date – this can extend to interest due for previous late payment of rent even if it has not been demanded by the landlord or the surveyor’s costs for preparing and serving a schedule of dilapidations, so long as those sums are properly due under the terms of the lease.
The advice for tenants, first and foremost, is to make sure they allow plenty of time to take legal advice before exercising the break. It should never be left until the last moment. The tenant should be clear on who the notice should come from (this might not be obvious for example in a group company structure), who it needs to be served on (for example, the landlord and/or its agents), precisely how and by when it needs to be served, and what other requirements must be met (and by when) for the break to be effective.
The notice should be served in good time, to allow for any problems in service, and a comprehensive strategy agreed for complying with any conditions.
If one of the conditions is that no sums are outstanding at the break date, the tenant should check back through its accounts whether rent or other sums have ever been paid late and, if so, whether there is outstanding interest due to the landlord. Any demands for other costs, for example, insurance or surveyor’s fees for a schedule of dilapidations, should also be paid in full.
If compliance with all covenants is a condition of the break, this will include the repairing covenants and even minor disrepair could invalidate the break. A landlord can be asked to agree the extent of any repair works required. However, any savvy landlord is unlikely to do so and will probably leave it up to the tenant to work out what it needs to do.
The advice for landlords is to say as little as possible to the tenant in relation to the break or any conditions attached to it. Care should be taken to properly scrutinise and, if in any doubt, take advice on the validity of any break notice served on it. Some of the requirements can be very subtle and are easily missed.
Whilst a landlord can acknowledge receipt of a notice, it should never confirm to a tenant that it accepts a notice as valid unless it is sure that it is, otherwise it is likely to be prevented from challenging the notice in the future. The same applies to a landlord’s agents, as they often have the ability to waive a landlord’s right to insist on the strict requirements of the lease having been met.
Break clauses can be a lifeline for tenants in the current economic climate, but a landlord will be unlikely to wave goodbye to a good tenant without putting up a fight. Whether you are a landlord or a tenant, we recommend taking advice on your position at the earliest opportunity.