Breaking a Lease: What a Tenant Needs to Know

October 21, 2017

 

Failure to comply strictly with the conditions in a break clause could invalidate your right to break your lease. Even seemingly innocuous clauses can be fraught with traps for the unwary tenant and a recent flurry of case law serves as a stark warning of the consequences of getting things wrong. So what approach should a tenant take when it intends to exercise a break?

First and foremost and well in advance of the service of your break notice, check the conditions attaching to your break right carefully to ensure that you are in a position to fully satisfy them. Remember these will be strictly construed by the Courts in the event of a dispute.

Most break rights are conditional, at the very least, upon payment by the break date of the main rent and the giving up of vacant possession. Some go even further by requiring the payment of all sums due under the lease or compliance with all tenant covenants.

Payment of Rent/All sums due – It is important to understand that, unless your lease provides otherwise, you must pay the full amount of rent due on the rent payment date immediately preceding the break date and not just the apportioned amount attributable to the period from the last rent payment date to the actual break date. A tenant who only makes a pro- rata payment in these terms will lose the right to break, if termination is conditional upon the relevant payment having been made. This was exactly what happened in the PCE Investors case, when after the break date, the landlord argued successfully that the break had been ineffective because the tenant had not paid the full quarters rent on the last quarter day.

Some break clauses go even further by containing particularly onerous conditions, which require the payment, not just of the main rent, but of all sums due under the lease. This will catch not only the rent, service charge and insurance payments, but also any costs due to the landlord and interest on any sums which may have been paid late, irrespective of whether or not this interest has ever been demanded. The decision in the Avocet case is a frightening example of what can happen in terms of outstanding interest. In that case the Court held that failure by the tenant to pay interest on late payments in the sum of £130 invalidated the break right, even though the Landlord had not sought payment of the interest until after the break date itself had passed. So for a trivial amount the Tenant lost its right to break and was forced to continue the lease with a rent liability of in excess of £300,000.

The bottom line, if your break clause contains such a condition, is that you should carry out a careful audit of all payments made and required under the lease up to the break date. Always err on the side of caution and if there are any amounts that are in dispute pay these over on a without prejudice basis. Better to validly exercise your break and have an argument later, than find your liability under the lease continues.

Vacant Possession – As indicated above, vacant possession by the break date is also frequently seen in leases as a condition of the right to break. But what does vacant possession mean in this context? The landlord must be able to assume immediate and exclusive possession, occupation and control of the property which should be empty of people and empty of chattels. In the NYK logistics case the tenant left a security guard on the premises after the break date and carried out some works of repair as had been previously agreed with the landlord’s surveyor. The result? The tenant had not given vacant possession and therefore had not validly exercised its break.

Further Conditions – Some (mainly older) leases require, not only that all payments due be made by the break date, but also require compliance with all tenant covenants, including repairing and decorating covenants. If your lease contains this type of clause you should tread very carefully. You could consider asking the landlord in plenty of time for confirmation of the steps you need to take in order to comply with any conditions and request that a schedule of dilapidations be prepared in relation to any repair works, though the landlord has no obligation to assist you in this regard.

In all cases you should consider carrying out a full compliance audit with a surveyor’s advice before serving the break notice, to give yourself sufficient time to remedy any breaches which may have occurred. Otherwise you run the risk of a trivial want of repair scuppering your right to break.

Other issues – As well as ensuring you can comply with your pre-conditions it is of vital importance to ensure the break notice is served strictly in accordance with the requirements of your lease. Keep evidence of the method of posting and ask the landlord to acknowledge receipt. If the notice is served by an agent ensure that the existence of the agency and the agent’s authority is disclosed to the Landlord.

If there are any outstanding breaches you could consider asking the landlord to accept the break notice upon payment of an agreed amount as liquidated damages.

As we can see from the above examples recent case law has shown that the exercise of a break clause in the current economic climate should be approached with extreme caution. Landlords will do all they can to hold on to a tenant and up to now the Courts decisions in the area have aided them well. Be clear on what is required by your lease, allow plenty of time to deal with your conditions and take legal advice should any uncertainties come to the fore.

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