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Tenant’s Break Clauses - a trap for the unwary
If you or your business requires advice regarding break clauses, speak to us today by calling 0345 872 6666 or by completing the enquiry form at the top of this page.
It is not uncommon for a commercial lease to contain a break clause in favour of the tenant. However, in the prevailing economic climate, and perhaps now more than ever, it is essential that tenants with the benefit of a break clause are actually able to exercise them.
In practice, it is often the case that such break clauses are expressed to be conditional on the tenant having paid the rents reserved, observed and performed the tenant’s covenants and provided vacant possession.
Such conditions can, however, be a minefield for the tenant, as the Courts will strictly construe a break clause and any conditions attached to it, the results of which can be disastrous.
This was highlighted in the recent case of Avocet Industrial Estates LLP –v- Merol and another (2011).
Avocet Industrial Estates LLP v Merol and another
In this case, the High Court considered whether a tenant had validly complied with a break clause in its lease. The break clause was subject to several conditions, including any payment due under the lease having been paid on or before the break date and the tenant having to pay a sum equal to 6 months’ rent on or before the break date.
The High Court found that the tenant had occasionally been late in the payment of rents and therefore interest of around £130 was owed, which had not been paid. As a result, the tenant was held to be in default of the terms of the lease and the tenant’s break notice was held not to have been validly exercised. This was the case even though the level of interest involved was relatively small, the landlord had not issued a demand for the interest and the landlord had not utilised a rent deposit that he was also holding by way of security for non-payment of rent. The tenant had failed to pay all sums due under the lease at the break date, and accordingly would now be bound by the terms of the lease for the remaining 5 years of the term at a rent in the region of £67,000 per annum.
Pre-conditions to exercising a break clause
The Code for Leasing Business Premises in England and Wales 2007 (“the Code”) recommends that the only pre-conditions to tenants exercising a break clause should be that they are up to date with the main rent, give up occupation and leave behind no continuing sub-leases. Disputes about the state of the premises, or what has been left behind or removed, should be dealt with later, as with a normal lease expiry.
However, compliance with the Code is not compulsory. The best protection for a tenant is to have an appropriately worded break clause in the first place and when exercising a break clause to ensure that all pre-conditions have been fully satisfied. Otherwise, as the above case illustrates, there is a real danger that the tenant will find itself committed for a further period to an unwanted property.
Conditional break clauses – a trap for the unwary!
Get in touch
At JMW, we are experts in helping clients with all dealings relating to break clauses, and especially in relation to tenants wishing to exercise them. Speak to us today to discuss your situation and find out how we can help.
Call us on 0345 872 6666 or complete the online enquiry form at the top of this page, enabling us to contact you.
Our Manchester Partners
Partner and Head of Department
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