Comply or die – broken breaks

167
Steve Schofield, Partner, Commercial Property, Bristol, Thrings. Photo: Professional Images/@ProfImages

In the final part of his three-article series on break clauses, Steve Schofield, partner at leading commercial law firm Thrings, considers break conditions which require tenants to comply with their lease obligations before a break can be exercised.

Having previously discussed difficulties in giving vacant possession and payment issues arising from ending a lease early, attention now turns to what is potentially the biggest trap: clauses which require tenants to comply with their obligations in the lease before being able to end the lease.

Why is this dangerous?

In short, because it sounds so innocuous. In the vast majority of cases, honest tenants will always intend to comply with their obligations, and may not give this wording a second thought. They may be reluctant to query it, worried that it may sound like they are preparing to breach the lease terms.

If a tenant does query this sort of condition, they should be aware that some of the more unscrupulous landlords have been known to tell tenants there is no risk here, and that the tenant need only do what they have agreed to do. The problem with this is that no matter how well-intentioned, the vast majority of tenants do not comply with the terms of their leases. This is primarily because most leases are “full repairing” – i.e. the property must be maintained to a very high standard – which is usually only attained at the end of the term. Even if the property is in a reasonable condition, the tenant is unlikely to be complying with its lease obligations, and generally a competent surveyor could find evidence of breaches relatively easily.

One might expect the law to reflect the reality of the situation, but it does not. The law is clear that conditions requiring compliance with lease obligations must be strictly complied with. The courts will not be able to help, even if this leads to an unfair outcome for the tenant, who may be left without a right to terminate the lease.

Any breach, no matter how trivial, is enough to prevent the break from being exercised. It makes no difference if a tenant has genuinely tried to comply, that the landlord has been obstructive or unhelpful, or that tenants have followed their professional advisors’ instructions. Good intentions count for nothing.

What are the alternatives?

Currently, there is no workable alternative to this sort of condition. Over the years, tenants have experimented with requiring only “substantial” compliance or “reasonable” compliance with lease obligations, but in general these extra words have not helped tenants, and their exact effect is still very difficult to predict in practice. The only safe option is to delete these conditions altogether.

The Code for Leasing Business Premises in England and Wales 2007 – which sets out sensible conditions for both landlords and tenants – is often persuasive although not compulsory. It is telling that the code recommends there be no conditions around compliance with lease obligations and (unlike other commonly-used unfair conditions) does not offer any suggested alternative.

Is removal of this sort of condition unfair to landlords?

No – deleting this sort of condition does not mean tenants don’t have to comply with their lease obligations, merely that compliance is no longer a condition of the break. If a tenant exercises a break and the property is not left in the required condition, or there is some other breach, the landlord is still entitled to enforce those obligations. Deleting these conditions prevents landlords pointing to (sometimes very minor) breaches of the lease to justify blocking the exercise of break rights, and holding tenants to leases they no longer want.

Action points

If you have an existing lease with a break with this sort of condition, take advice early to see where you stand. It is sometimes possible to make useful preparations if there is sufficient time, including asking a surveyor to survey the property to check compliance with the lease and then ensuring all issues are resolved.

If you are entering into a new lease and the landlord proposes such a condition, do not accept it. Landlords will usually back down once you demonstrate you understand the issue; if they don’t, you should treat the break clause as unenforceable and consider whether or not you are still prepared to proceed with the lease without a break.