Lease break options - top five tips
This article was included in the spring 2011 issue of Informer - the real estate newsletter.
Antony Phillips looks at the pitfalls that can be encountered when a tenant exercises a break clause and offers five tips to minimise the risks involved.
A tenant's break option in a lease represents a potential opportunity for a tenant either to relocate to cheaper or more appropriate premises or to renegotiate the terms of its lease. Particularly in recessionary times, and where a lease has upward only rent reviews, this can be a very valuable provision indeed for a tenant.
However, break options are often not all that they seem. Many break options contain conditions, some of which can be difficult, if not impossible, to satisfy. As all conditions in break options are construed strictly, non-compliance will frustrate the break, meaning that the lease will continue. Consequently, break options need to be approached with great care.
Here are my top 5 tips for tenants:
Tip 1 - get the drafting right
If you are a tenant, you will want as few conditions as possible attached to your ability to break. Ideally, the only condition will be service of the notice to break. However, it may be necessary to agree to give vacant possession (but see tip 5) and payment of principal rent. You should resist a condition that requires compliance of all covenants as a condition of the break - such a condition will be extremely difficult to comply with (see tip 5).
Tip 2 - prepare early
All break options will require the tenant to give formal notice to the landlord if it wishes to break. Often that notice period is 6 months, but sometimes it is longer - 12 months is not unusual. This means that a tenant who wants to break should look at the break option in the lease at least 12 months before the break date. A further reason for looking at the option well in advance is that it may well take several months to comply with the other conditions in the option - these may include complying with all covenants (such as repair and reinstatement) both when the break notice is served and on the break date.
Tip 3 - be careful with the notice
Whilst most break provisions do not prescribe a certain form of notice, some do. If the clause is specific as to the notice form, the tenant must comply with such terms. If no specific form of the notice is required, the notice must be clear as regards the following:
- To whom it is directed (normally the landlord);
- Which provision it relates to (i.e. the break clause); and
- What it is intended to do (i.e. operate the break).
Not only does the notice need to be served by the date specified in the break clause, but it also needs to be served on the correct party at the right address. The correct party is normally (but not always) the landlord. The registered office of the landlord may well be the best address, but it will not be the right address if the break clause (or the general 'service of notice' provisions in the lease) specify another address. Once again, the terms of the break clause/other relevant lease provisions must be complied with fully. If there is any doubt (and in any event), it is sensible to serve copies of the notice at other addresses for the landlord (as well as upon the landlord's agents and lawyers).
Whilst the tenant in the recent case of MW Trustees Ltd -v- Telular Corporation was successful in persuading the court that a break notice addressed to the former landlord (rather than the current landlord) was a valid and effective notice, other tenants may not be so fortunate. In that case, the tenant was assisted by correspondence following service of the notice which helped show that the landlord was not misled as to the intentions of the tenant. However, in other cases, a similar error may well invalidate the notice.
Tip 4 - manage compliance carefully
To comply even with a relatively straightforward break provision takes a good deal of care. For example, a break option requiring the tenant to give vacant possession and pay the principal rent by the break date means that the tenant must establish precisely what rent is due (remembering that there will be no apportionment of rent unless the lease expressly provides for it). In respect of vacant possession, the law is far from clear as to what this means in practical terms. To be entirely sure that vacant possession is being delivered, there may be a considerable amount of work required in the removal of all chattels (which may include cabling and so on).
In respect of a break provision that requires full compliance, very careful management of the process will be needed if the tenant is to have any realistic chance of breaking. This will involve a considerable work not only by the tenant itself, but also advice and input from the lawyers and agents. In addition, an independent surveyor should 'sign off' the works as being compliant before the relevant date (usually the break date).
Tip 5 - don't be distracted by the landlord
It is almost always sensible for the tenant to speak to the landlord about the break to see if a deal can be done. However, the landlord is under no obligation to discuss the matter with tenant and, unless and until a legally binding deal is achieved by the parties, the landlord can break off any discussions that it is having with the tenant at any time. Therefore, great care needs to be taken to ensure that a sense of security is not allowed to be created as a result of such discussions. This means that, unless a binding deal has been done (however well discussions are progressing), the tenant must comply with all conditions (by the compliance date) if the lease is to be broken effectively.
This means that if, for example, there is a 3 month programme of works required in order to comply with a fully conditional break option, the tenant must commence the works at least 3 months before the compliance date. It does not matter how close the parties are to doing a deal - the works must go ahead. If the works do not start, and if the tenant is left with insufficient time to comply with the conditions, it is highly likely that the terms that the landlord then offers will be dramatically less advantageous to the tenant (if, indeed, the landlord is then willing to do any deal at all).
Whilst it sounds self-serving to say so, the most important tip of all for a tenant seeking to operate a break option really is to get the very best advice. So please do get in touch.