A topical look at commercial lease break clauses.
All commercial premises which are let out to business occupiers are let using leases that are governed by the 1954 Landlord and Tenant Act. They tend to be complicated documents at the best of times, and more importantly they legally contract the Landlord with tenant for the period of the term agreed. Once signed, they cannot be varied, unless both parties agree to the change. If the change is going to cost the Landlord money, then unless there is a quid pro quo, it is unlikely that he is going to agree to the change. As the saying goes, Turkeys don’t vote for Christmas.
During the recession, one of the main trends for commercial leases is to see the incorporation of break clauses in the tenants’ favour, whereby after a period of time, a Tenant can give three months written notice to a landlord of their intention to vacate the building. The other trend is for stepped rents to be agreed, as Landlords are increasingly keen to let vacant buildings to maximise rental income and offer a reduced initial rent as an inducement to attract an occupier for their building.
Quite often leases are agreed for a term of 3 years, with a break clause inserted at 18 months. The first year of the term passes quickly, circumstances may change, and the Tenant finds that they want to vacate the property. It is essential that the way the break clause is activated is done correctly to ensure a successful end to the lease. If the lease says notice must be given three months prior to the break date, it is vital that this is done. If the lease says that all sums owed to the Landlord must be paid before the notice is served, failure to do so will render the break notice ineffective. The landlord will refuse to accept it, and the Tenant will be stuck in the property for the remainder of the lease, together with all the outstanding and ongoing liabilities.
I have just read the details of a legal case, (Avocet Industrial estates vs Merol 19.12.11) where this actually happened, the annual rent was £67,500 per annum, there were 5 years remaining on the lease, and the Tenant tried to break the lease to escape the final half of the 10 year term. The Tenant actually used a solicitor to issue the break clause to the Landlord, and they liaised with the Landlord subsequently in relation to the Tenant paying all rents, service charges and insurance premiums, and satisfying the various conditions attached to the right to break the lease.
Several months after the break clause, having received the keys and a rent cheque for the last six months rent, the Landlord challenged the effectiveness of the break clause, and after much argument the case ended up in front of a Judge. The Judge admitted the decision was harsh, but found that the break clause was ineffective not because the rent was paid by cheque, which technically was not legal currency until cleared, but because the rent had been paid late in the past, there had been arrears of interest on late payments, which had never been paid. Indeed the interest had not even be formally demanded, but because there was a mechanism for calculating the interest in the lease, the Tenant should have been able to calculate the interest due and pay it in order to comply with the requirements listed in the lease. The sum involved was approximately £130.
It was a sobering result, which is why I have decided to recant the tale. If you are a commercial tenant occupying business premises, it is a very good idea to take professional advice if you are contemplating activating a break clause, to ensure you get it right. Timing is critical, and if you get it wrong, you will be stuck in situ for the remainder of the term.
The other crucial time in a lease is the term date. It is essential that if a lease is to be brought to an end at the end of the term, then vacant possession must be given to the Landlord. Vacant possession means that all rubbish is removed, and that the premises are handed back as they were offered to the Tenant at the outset of the lease. It is also important to comply with other covenants regarding repair and re-decoration. Invariably the cheapest option is to complete the works while you still have possession of the property, and don’t leave it to the night before the lease ends.
What happens if you don’t, well you will receive a list of dilapidation works, which are fully costed, the Landlord will be fully entitled to charge for the works to be completed, and to add salt to the wound, he will be able to charge rent for the building while the works are completed as the building will be deemed to be unlettable. These liabilities can be substantial, we handled one property where there were a lot of outstanding dilapidation works, and the eventual bill reached approximately £60,000. If it had gone in front of a judge, he would have found in favour of the Landlord because the liabilities arose from implementing the lease which is a contract entered freely into by both the Landlord and the Tenant.
If you are contemplating entering into a lease, or are looking implementing a break clause, then it is a very good idea to seek professional advice from a surveyor or solicitor. It may cost some money, but invariably it will save you a lot of money in the long term.
This is an original blog by Tony Rowland, The Property Doctor of Timothy Lea & Griffith's
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