In the first of a series of three articles on break clauses, Steve Schofield, partner at leading commercial law firm Thrings, considers the case of Riverside Park Ltd v NHS Property Services Ltd and assesses what it means for tenants wanting to terminate their leases.
The recent case of Riverside Park Ltd v NHS Property Services Ltd has not only brought the issue of break clauses into sharp focus, but also provided plenty of food for thought for landlords and tenants when it comes to compliance with pre-conditions.
Landlords Riverside granted tenants NHS Property Services a 10-year lease, which included a break clause on the fifth anniversary of the term, conditional on the latter giving vacant possession. NHS Property Services Ltd had installed demountable partitioning at the premises which it failed to remove. The court decided that the partitioning counted (for these purposes) as the tenant’s personal property; the fact that the partitions were left at the premises meant the premises were not vacant.
The courts ruled that NHS Property Services was not entitled to terminate the lease, and had to continue paying the rent (and performing the other lease obligations) for the rest of the lease term.
What is a break clause?
In simple terms, a break clause is a right to end a lease early. They can be problematic because when leases are being drawn up, many landlords seek conditional break clauses. As a result, the tenant can only end the lease if they comply with various conditions such as giving vacant possession of the premises, paying all sums due to the landlord, and complying with all of their obligations in the lease.
While these conditions sound straightforward and reasonable, they can also be deceptive, and poorly advised tenants can be forgiven for accepting them. They can often also be difficult or impossible to comply with, meaning the tenant’s right to end the lease simply isn’t effective, and they can find themselves tied into a lease it expected to be able to terminate.
Unfortunately, the law is firmly on the side of landlords, and will not help a tenant who signs up to one of these conditions.
Is the Riverside ruling a one-off?
Yes and no. Whilst all cases turn on their facts, requirements that tenants give “vacant possession” are often problematic. This case is a useful reminder of the difficult and unexpected effects these conditions can bring.
In a 2011 case – NYK Logistics (UK) Ltd v Ibrend Estates BV – the tenant (NYK) had moved out of the premises before the termination date. But two workmen remained to finish off some works the tenant was obliged to do. The tenant also left a security guard in the premises because it was concerned about possible vandalism. This was hardly unfair to the landlord – everything the tenant was doing was being done in good faith for the benefit of both the landlord and the tenant. However, the court decided that this continued occupation still meant “vacant possession” had not been given, and allowed the landlord to cancel the break right. This case is another example of how strictly courts will look at these conditions.
What do these cases teach us?
In short, any tenant taking a new lease should look carefully at break conditions, ideally whilst they are negotiating the key terms with the landlord’s agent.
Many large occupiers simply won’t accept any conditions at all, largely due to the uncertainty they create. If tenants cannot secure the conditions, they should insist that any break conditions comply with the Code for Leasing Business Premises in England and Wales 2007.
The code was developed in collaboration between professionals, industry bodies and the Department for Communities and Local Government. While use of the code isn’t compulsory, it is generally held to be fair to both landlords and tenants, and sets out sensible conditions which tenants should be able to comply with. For a tenant, showing that they understand most other conditions are potentially unfair is often half the battle, and quoting the code to landlords can help with that.
It is highly recommended that anyone with an existing lease who is considering exercising a break right seeks legal advice in good time to ensure they understand what needs to be done to comply with any of the relevant conditions. They might have to carry out extensive works to the property, remove alterations or even arrange to serve a legal notice abroad, all of which are more difficult at short notice. Discussing this with a lawyer up to 12 months before the termination date is advisable (assuming they have to give six months’ notice to the landlord).