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Putting the brake on break clauses in commercial leases

Modern storehouse

Modern storehouseAs companies look for ways to save money, disposing of premises that are surplus to requirements is high on the agenda.  On the other side of the coin, landlords don’t want to suffer another void in this climate especially given the current draconian empty rates regime.

The net result is that there are more arguments than ever about whether tenant break clauses have been exercised effectively.  Tenants must ensure that not only the break notice itself has been properly served, but also that they have complied fully with all the conditions of the break clause.  It is clear from recent Court decisions that any failure to comply, however minor, will result in the break clause not having been validly exercised.

There are a number of points to look out for.

What if the break date is in the middle of the quarter?
If the break date is in the middle of a quarter and is conditional on paying all rents, then you need to pay the full quarter’s rent on time.  You may be entitled to a refund for the period after the break date to the end of the quarter but the important point is that the landlord is entitled to the full quarter’s rent. The landlord will also be entitled to the full quarter’s service charges and insurance if those are defined as payments of rent under the lease (PCE Investors v Cancer Research UK).

What if the break clause requires the tenant to pay ‘all sums due’?
What if the break clause requires the tenant to pay “all sums due under the lease” for the break clause to be effective?  Will this include interest payable under previous payments of rent that may have been paid late even if the landlord has not demanded interest?  In Advocet Industrial Estate LLP v Merol Limited, the exercise of the break was invalid where a tenant did not pay interest on previous late payments of rent in such circumstances.  The Judge said the result was harsh but one that he had to reach on legal analysis.

What if premium is payable on the break date?
What if the lease requires payment of a premium on the break date as well as all rent being paid up to date?  Where the break date falls part way through a quarter, the tenant must pay the whole quarter’s rent plus any premium on top of that.  In Canonical UK v TST Millbank the tenant tried to argue that part of the advance rent should be attributable to the break date premium.  The Court disagreed.

Where a tenant wants to exercise a break clause it is essential that proper legal advice is given to analyse the precise wording of the conditions at an early stage so that steps can be taken to ensure compliance and to make absolutely sure that the break will be effective.

By Elizabeth Deyong, Head of Commercial Property at Cambridge solicitors Barr Ellison.

Disclaimer: While we do all that is possible in terms of ensuring its accuracy, this blog contains general information only. Nothing in these pages constitutes legal advice. You need to consult a suitably qualified lawyer from the firm on any specific legal problem or matter.

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