London,
12
August
2016
|
12:29
Europe/Amsterdam

Break Options

For many years Break Options have ensured flexibility in leases but they take on new significance when market conditions are uncertain. Tenants’ business needs when they are in a position to exercise a Break Option may be very different to when the Lease was granted or assigned to them. A landlord, faced with the prospect of empty premises following service of Break Notice, may wish to do everything possible to keep the tenant locked into its lease. This makes it all the more important for tenants to ensure that they have done everything possible to comply with any pre-conditions attached to the exercise of a Break Option.

Conditions to be satisfied on a break

Many modern leases contain wording requiring a tenant to comply "reasonably" or "substantially" with its leasehold covenants, as a condition for the Break Option to be satisfied. Alternatively, a lease may state that it will not terminate if the tenant is in material breach of its covenants.

The case of Fitzroy House Epworth Street (1) Limited v The Financial Times Limited determined that a Court must assess material compliance of leasehold covenants by considering what effect the breaches had on the landlord’s ability to re-let or sell the premises without delay or additional expenditure. The Court will use building surveyors to assess the degree of each alleged breach of a repairing covenant.

Vacant Possession

Many Break Options will require the tenant to give up vacant possession of the premises as at expiry of the Break Notice. This means:

  1. The tenant must hand back the keys of the premises to the landlord by the Break Date
     
  2. There should be no physical impediment preventing the landlord from exercising its legal right to possession. This has the following consequences:
     
    1. The tenant should always remove its chattels. A chattel is an object that is generally not fixed to the ground but rests there on its own weight. A tenant which fails to remove a chattel will not have given vacant possession
       
    2. A tenant may be entitled to leave its fixtures where they are, if it has not expressly covenanted in its Lease or Licence for Alterations to remove them at the end of the tenancy. In contrast to chattels, fixtures are items which are fixed to the ground.
       

There can be disputes regarding whether certain items (such as suspended ceilings or partitions) constitute chattels or fixtures.

Payment of sums due under the Lease.

Sometimes the Break Option will expressly require that the rent is not in arrears at the Break Date. Depending on the way the clause is worded, this may refer either to the principal rent, or to all sums reserved as rent (which may include service charge and/or insurance).

What must be paid on the last quarter date when the Break Date falls between two quarter dates? The position, settled in the Supreme Court decision in Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and Another ([2015] UKSC 72) is that unless the Lease clearly states otherwise, a landlord is entitled to the entire quarter’s rent, even when the Break Date fell between two quarters.

Waiver

A landlord receiving a Break Notice may waive any defect causing it to be invalid, but a tenant may only withdraw a valid Break Notice where the Lease expressly permits this. If the tenant mistakenly serves a valid Break Notice and wishes to continue in occupation, it will need to negotiate a fresh lease with the landlord.

If there is doubt about whether a Break Notice is valid, a tenant can serve a second Notice without prejudice to the validity of the first, although this can only be done before any time limit in the Lease for serving a Break Notice expires.

A landlord must be very careful not to waive a condition in a break clause by agreement. This happened in the case of Legal & General Assurance Society v Expeditors International (UK) Limited ([2007] L & TR 229), in which the Break Option required the tenant to give vacant possession on the expiry of its lease. The landlord reached a dilapidations settlement with its tenant. The Court held that the effect of this settlement was that time was no longer of the essence for the purposes of the tenant giving vacant possession, so the exercise of the Break Option was still successful despite the tenant not giving vacant possession on the Break Date.

Practical advice

A tenant should do the following when before exercising a Break Option.

  1. Instruct solicitors to consider the Break Option carefully and advise what must be done to comply with any conditions attached to the Option
     
  2. If the Lease requires that the tenant complies materially with its leasehold covenants, the tenant should carefully review copies of any Licences for Alterations, to establish whether they oblige it to reinstate works that have been carried out
     
  3. Draw up a generous timetable for completing any works that need to be undertaken
     
  4. Initiate a dialogue with the landlord or its agents, to try to agree on the work that needs to be done in order to comply with the pre-conditions of the Break Option. Even if no agreement can be reached, it could be that the presence of the correspondence setting out the parameters of the negotiations could help the tenant from overcoming a subsequent objection by the landlord that it has failed to carry out the works in the manner required.