Break clauses must be strictly adhered to if they are to be effective, a commercial property expert has warned.
If not, tenants can lose out badly, according to Anna Steemson, a solicitor in the Real Estate team at Lodders in Stratford-upon-Avon.
Many commercial leases, even more so during the economic downturn contain break clauses. Break clauses are normally drafted so that the tenant can end the lease on a specified date, subject to giving notice, if they have complied with the terms of the lease and given possession of the property back to the landlord.
The requirement to play it strictly by the book has again been emphasised following a recent Court of Appeal case. In NYK Logistics (UK) Ltd and Ibrend Estates BV the tenant lost the right to break because they hadn’t completely vacated the property on the date in question.
The tenant had served notice to exercise the break, following which the landlord prepared a schedule of dilapidations. The landlord and tenant met a couple of days before the break date and it was agreed that the tenant had substantially complied with its repairing obligation.
However there were a few minor repairs which needed to be completed. As these repairs could not be completed by the break date, the tenant suggested that it would carry out the works in the week after the break date. The tenant wanted to carry out the additional repairs in order to avoid any claim for damages, which would exceed the cost of carrying out the repairs.
The tenant also hired two security guards to monitor the property because they feared it would be vandalised.
The court decided that the presence of the workmen and security guards at the break date meant that the tenant hadn’t properly vacated, therefore hadn’t complied with the conditions of the break clause and so lost their right to break the lease.
The decision was made despite efforts by the tenant to contact the landlord to agree a timescale to carry out the repairs and return the keys. The Court decided that the tenant should have negotiated and agreed with the landlord prior to the break date, to re-enter the property as a licensee after the break date to carry out the repairs, but should in any event have vacated the property and returned the keys on the break date.
Ms Steemson said: “Break clauses can be complicated and must be strictly complied with to be effective.
“For example it is easy for a tenant to be caught out by not serving the notice correctly. Tenants must ensure that all of the conditions have been complied with. There may be an obligation within the lease to have complied with the terms of the lease and any supplemental documents.
“Supplemental documents may include rent deposits which may require the deposit to be topped up to take account of the recent increase in VAT. From a landlord’s point of view the case reinforces the approach of the Court that tenants must strictly comply with the terms of the break clause if the break is to be effective.”
Ms Steemson said there were also wider implications.
“The extent of obligations under a lease can be something of a minefield, there is plenty of scope for grey areas and disputes, depending on how well the lease is drafted. The cost of the tenant of losing its right to break can be significant, particularly if there is not another option to break for some time”.
