Blog - 05/05/2021
Break Clauses in Commercial Leases – What is “the Premises” and other conditions precedent
The Covid-19 pandemic has undoubtedly brought about an unprecedented change to the way in which employees work. After a year of enforced home working, many companies have now decided to take a flexible approach to office working moving forwards, which inevitably means that commercial tenants across the country are now looking to adjust and in many cases reduce the amount of office space they need.
Unfortunately, moving from an unwanted office is not so easy if a company is tied into a lease of a property with a number of years left to run. A break clause will therefore be a saving grace for many tenants who would otherwise be forced to continue to pay for a property they no longer need.
The first step for any tenant looking to terminate their lease early is to check whether their lease contains a break clause. If there is a break clause, it is then essential that any conditions attached to the ability to exercise the break clause are complied with, to ensure that a valid break notice is served on the landlord. Failure to comply with the conditions could mean the landlord successfully arguing that the break notice is invalid and leave the tenant tied into its obligations under the lease for the remainder of the term. Therefore, even a small mistake could turn out to be potentially costly and time consuming and be a substantial liability for the tenant’s business.
The recent decision of Capitol Park Leeds plc v Global Radio Services Ltd  EWHC 2750 (Ch) demonstrated just how strictly a break clause is likely to be interpreted by the Court.
In this case the tenant served notice to exercise a break clause which required the tenant to give vacant possession on the break date. The tenant began undertaking dilapidations works and stripped out the entire property, including radiators, light fittings and ceiling tiles, leaving just a shell of the building.
In the meantime the tenant entered into negotiations with the landlord, with the aim of agreeing a sum to pay to the landlord in lieu of the dilapidations work. Works were paused while negotiations were ongoing but as the break date grew nearer, negotiations unfortunately broke down and the tenant was left with just weeks to complete the works required to the property.
The tenant ultimately ran out of time and was left with no choice but to hand back the property on the break date and claim that it had given vacant possession.
The Court found that the whether vacant possession had been given depended heavily on the definition of “Premises” in the lease. While giving back an empty shell of a building could sometimes be considered to be vacant possession, here the definition of premises specifically included “all fixtures and fittings”. The tenant had stripped out so many of the original fittings that the property was found to be dysfunctional and unable to be occupied. Moreover, it was found that what the tenant handed back on the break date was not “the Premises” as defined in the lease but “considerably” less. Consequently, the court held the tenant had not satisfied the break condition by its failure to give up vacant possession.
This decision has expanded upon the definition of “Premises” and explored what it means to give vacant possession. It is also a reminder of just how important it is to comply with the conditions set out in a break clause and to pay close attention to the defined terms in a lease; in this case had the definition of Premises not included fixtures and fittings, the outcome may have been difficult.
Other Conditions of Break Clauses
Aside from vacant possession, other conditions to look out for when exercising a break clause include the following:-
- Who can exercise the break clause?
The break clause may specify that either party can exercise the break clause, or that it is just exercisable by the tenant or landlord respectively.
The break clause may give a specific date on which it may be exercised or it might be that it can only be exercised after a certain period, for example, a tenant may be unable to exercise the break clause during the first year of the lease. Similarly, the tenant may be required to give the landlord a certain amount of notice of its intention to terminate the lease. It is crucial to keep an eye on these deadlines to ensure that the correct amount of notice is given as failure to do so could result in the tenant missing its chance to exercise the break clause.
The form of notice given by the tenant and the method by which the notice is served may also be important. The lease may specify the content of notice, the methods of service and the address at which the landlord should be served. A tenant should check these requirements carefully to ensure that the notice is valid and remember to check how the notice should be served, for example service by email may not be sufficient, even during a global pandemic.
A break clause is likely to require that all rent is paid in full at the date of the exercise of the break clause. This means that any disputes with the landlord regarding rent need to be resolved before a break clause with this condition precedent can be satisfied. This is more of a problem than ever as Covid-19 has caused many tenants to fall behind on their rent. Even if a landlord has been helpful and agreed a rent reduction or payment plan, this will not necessarily absolve the tenant from a condition that specified that all rent must be paid in full. It is therefore essential that any agreements made with the landlord are formally recorded in writing and the effect of any such agreement on a break clause is considered and specialist advice obtained well in advance.
- Dilapidations & Reinstatement of the property
The break clause may require the tenant to have complied with a lease covenant requiring there to be no subsisting material breach of any of the tenant covenants in the lease and/or its reinstatement obligations under the lease, e.g. reinstatement of alterations made to the property during the term. Again, Covid-19 may cause some tenants practical difficulty here, especially if a contractor is unable to attend to carry out work.
It is important to remember that every lease is different, so there may be more or less conditions for a tenant to comply with than those discussed here and advice should be obtained to protect the business interest.
If you require assistance in exercising a break clause, challenging its validity or have concerns about any of the clauses in your lease then please feel free to contact Shams Rahman, Emma Gregory or any member of the Property Litigation team.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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