Room with a View - We were on a break: break clauses and unintended consequences


23 June 2020

A break clause is commonly included in modern leases to allow one or both parties (but usually the tenant) to end a lease on a predetermined date, prior to the end of the agreed term.

In an uncertain market for both landlords and tenants, such clauses are as important as ever, but their significance can often lead to dispute. This article takes a brief look at some of the key considerations when negotiating, drafting and exercising break clauses, along with a few pitfalls.

To break or not to break

Negotiating the inclusion of a break clause in a lease will often come down to market conditions and the bargaining strength of the respective parties. For a tenant, a break clause is a useful tool to help manage its property liabilities. If it outgrows its current premises or suffers an income drop, the break gives it a way of ending the cost liability early.

Having agreed the inclusion of a break clause in a lease, there are three key considerations in the drafting of a break clause:

  • when will the break date be? Will there be several break dates, or a single fixed date? 
  • will there be any conditions on the party exercising the break? 
  • how will notice need to be served to exercise the break?

It is the latter two points which often lead to dispute between landlords and tenants, and which are worth considering in more detail.

Conditions and notices – it’s all in the detail

Any conditions included in a break clause must be strictly complied with so that the break can be exercised properly. If the conditions are not satisfied, then this can result in an invalid notice, which might mean a party losing a one-off opportunity to end the lease.

Conditions to a break clause can be either absolute or qualified. Where a condition is specified to be absolute, then where a breach exists this will prevent the tenant from exercising the break clause. But if such a breach is remedied in sufficient time, then the tenant will have complied and so can exercise the break. Compliance in sufficient time is dependent on the construction of the break clause.

A qualified condition is one where a tenant will need to have complied with a requirement to a pre-agreed level. The level of whether the condition is satisfied is dependent on the construction of the clause. For example, the requirements of a condition being ‘substantially’ complied with is vastly different to one that is described as being ‘reasonably’ complied with.

It is possible for either landlord or tenant to waive compliance with a condition imposed on the other party. Such a waiver can be made in writing, orally, or interpreted by conduct. It is especially important for each party to remember that if they intend to dispute an intended break, then their conduct may amount to acceptance of the break.

Having navigated a way through any break conditions, the final step will be to exercise the break clause effectively, usually by giving written notice in a specified manner. Typically, a lease will specify how and where a notice is to be served, and how much notice needs to be given. It is vitally important that these notice conditions are complied with, as even a minor error can invalidate a notice and result in the break date being missed.

To avoid the risk of non-compliance with any break conditions, professional advice should always be sought before serving any break notice.

No going back…

What happens if you serve notice to exercise a break, but then change your mind? In the first instance, a validly served break notice cannot be withdrawn without both parties’ agreement.

Even where both parties do agree to simply withdraw the notice, you might expect the original lease could then continue as though the break clause had never been exercised. Unfortunately, as is often the case in life, it is not as straightforward as you would hope and can result in some significant consequences.

Once the break date passes, the lease will still come to an end and a brand new tenancy will be created in its place. Depending on the circumstances of the original lease, the unintended creation of a new tenancy can have several implications that the parties should consider. For example, does the original lease have security of tenure under the Landlord and Tenant Act 1954? If the original lease does not have security of tenure, then the procedure for contracting out of the Landlord and Tenant Act 1954 will need to be followed again before the new lease comes into effect. If this process is not followed for the new tenancy, then the tenant could be unintentionally granted a statutory right to a new lease once the original term ends.

Additionally, where a lease has guarantors or surety arrangements, you should bear in mind that by creating a new tenancy, the original security or guarantors will be released from their obligations. These parties would need to enter into new agreements in order to ensure these obligations would continue to protect a landlord’s interests in a new tenancy.

Summary

All in all, what seems on the face of it to be a simple provision within a lease, if not carefully drafted and exercised, can go wrong quite quickly with significant consequences. Professional advice should always be sought when looking to exercise the provisions of a break clause, as it is very important to ensure that all conditions are met in order to effectively bring the lease to an end.

Things to remember:

  • Ensure that break clauses and conditions are drafted clearly
  • Remember that once served, a break notice cannot be withdrawn
  • Seek professional advice on serving notice to ensure conditions are met

For further information or advice concerning break notices, please contact Richard Grant or James Humphreys.

This article is from the summer 2020 issue of Room with a View, our newsletter aimed at professionals within the property industry. To download the latest issue, please visit the newsletter section of our website. Law covered as at June 2020.

To keep up-to-date with the latest news, legal updates and seminar information, please register and select the areas that are of interest to you.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at June 2020.