Hot Topic Highlight - Break Clauses

Posted on 10 / 08 / 17
by Jen Lemen

Hot Topic Highlight - Break Clauses

Building a better you

Property Elite’s sole aim is to build better property professionals - supporting your career every step of the way, whether you are completing a RICS accredited degree course, your RICS APC or simply seeking engaging CPD.

Our Hot Topic Highlight blog posts will arm you with information on the hottest topics - ready to tackle an important client meeting or begin revising for your RICS APC final assessment.

This blog article will focus on break clauses - what are they and why can they be so contentious? You can also listen to the audio version of our blog.

You can also download our blog in audio format and listen on the move. When you're done, request your free CPD certificate.

A quick reminder for any APC candidates:

  • Book your RICS APC final assessment review & feedback service - limited availability so contact us before it's too late

Relevant RICS APC competencies

  • Landlord & Tenant
  • Leasing & Letting
  • Valuation

Why is this relevant?

Windeyer J, in Burrell v Cameron (1977) said, 'in the sphere of options it is a cold, hard world'. Taking the wrong action or advice in relation to a break clause can lead to substantial cost & time implications.

In this article, we will consider:

  • What is a break clause?
  • Why are they contentious?
  • What governs break clauses?
  • What are the key components of a break clause?
  • How do I serve notice?
  • What is conditionality?
  • What is strict and modified compliance?
  • Typical conditions
  • 10 tips for success

What is a break clause?

A break clause, or option to determine, entitles a landlord or tenant to unilaterally determine a fixed-term lease before the fixed term expires by the effluxion of time. We will primarily cover tenant break clauses, rather than landlord's development break clauses, in this blog.

Effectively, this means that either/both parties can terminate the lease prior to expiry - depending on the terms of the break clause.

Where validly exercised, a lease will terminate on the break date and the tenant will have no future liability. Generally a claim for damages may be made by the landlord in respect of past breaches - this is usually explicitly reserved by the break clause.

Why are they contentious?

Break clauses are generally very black and white - getting it wrong often leads to a lease continuing until expiry with the associated cost implications. Recent caselaw has unsuccessfully tested the status quo, which tends to favour the position of the landlord.

The biggest issue is the opposing interests of the parties; tenants want flexibility to react to market conditions and changing operational requirements, whilst landlords are likely to wish to frustrate breaks to avoid being left with vacant property. Another key issue is market conditions; if the landlord thinks they can relet on better terms then the leverage of the tenant may be lost.

What governs break clauses?

  • The lease, although there is no standard form of break clause which can make interpretation tricky
  • Caselaw, which aids interpretation

There is no directly relevant legislation.

What are the key components of a break clause?

  • Break date - when will the lease terminate? This can be specified in the clause or sometimes calculated by way of a formula. The former is preferred as there is no room for confusion
  • Beneficiary - who can exercise the option? Make sure it is the party permitted to by the lease (Hexstone v AHC Westlink, 2010). If the break is personal to a named tenant, assigning the lease to another party and then back to the original tenant may render the break invalid (Linpac v Aviva, 2010)
  • Requirements for service of notice - what are they and have they been satisfied?

How do I serve notice?

Section 196 of the Law of Property Act 1925 applies in relation to service of notice, unless there is express wording to the contrary. Essentially, leave the notice at the last-known place of abode in the UK. Ideally use recorded delivery and keep proof of postage - email is often insufficient.

What is conditionality?

Conditions precedent are what you are required to do in order to operate the break successfully, e.g. give vacant possession, pay all sums due under the lease.

The most favourable break options are unconditional, i.e. there are no requirements!

The Code for Leasing Business Premises in England and Wales 2007 can provide a fallback position, i.e. 'the only pre-conditions to tenants exercising any break clauses should be that they are up to date with the main rent, give up occupation and leave behind no continuing subleases. Disputes about the state of the premises, or what has been left behind or removed, should be settled later (like with normal lease expiry)'.

What is strict and modified compliance?

Compliance can be strict or modified.

  • Strict - do exactly what is required of you by the break conditions (United Scientific Holdings v Burnley Borough Council, 1978)
  • Modified - there may be some flexibility in compliance, e.g. reasonable, material and substantial compliance

In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd (1997), the Judge stated that 'if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease’.

This shows the important of strict compliance where required, even where a condition defeats the commercial objective of a break clause. Tenants can easily and trivially forfeit their right to break.

Modified compliance can temper the effect of strict compliance, but the wording can be very subjective and open to interpretation. There is a health warning here - do too much, not too little. The Courts tend to be reluctant to alter the intentions of a commercial agreement, even if the results are contrary to business common sense. This means that they will typically not make a good bargain good.

Typical conditions

  • Subsisting breach of covenant (Bairstow Eves v Ripley, 1992) - if there is an absolute condition to perform the tenant's covenants, then make sure that this is followed. In this case, the tenant was required to undertake decoration works at a specific date. They undertook the works too early and the break was invalidated, even though there was no material difference in the standard of works
  • Payment of rent and other sums (Avocet v Merol, 2011) - in this case, the break was not exercised validly as the tenant had no paid all sums due, including £130 of penal interest which was not demanded by the landlord. The lease continued for a further 5 years at significant cost
  • Rent apportionment (PCE Investors v Cancer Research, 2010) (M&S v BNP Paribas, 2016) - both of these cases confirmed the position that unless there is an express apportionment clause (i.e. to allow a refund of rent for a partial period after the break date), then the tenant must pay the period in full and will not be entitled to a refund
  • Vacant possession (Riverside Park Ltd v NHS Property Services Ltd, 2016) - there is no legal definition of vacant possession. In this case, the tenant left behind large amounts of partitioning, kitchen units, window blinds, floor coverings, intruder alarm and water stand pipes which invalidated the break as vacant possession was not given

10 tips for success

  • Take early advice from a lawyer and surveyor
  • Keep an audit trail, e.g. file notes, proof of postage
  • Try to negotiate unconditional breaks in new leases
  • Ensure strict compliance where required
  • Do more, not less - even if modified compliance is required, do as much as you can to ensure the break is validly operated
  • If there is no explicit refund provision, pay the full period's rent
  • Request written confirmation from the landlord that the break has been exercised validly
  • Keep an event diary and review it frequently
  • Request a schedule of dilapidations in advance and agree steps for compliance in writing
  • Make contractors aware of strict timescales for stripping out works

Want to know more?

  • Book your RICS APC final assessment review & feedback service - limited availability so contact us before it's too late
  • Sign up for your free CPD certificate

Stay tuned for our next blog post to help build a better you

Note: while every effort is made to ensure the accuracy of the information given in this article, it is not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.