Interpreting break clauses

‘Each specific provision can become a trap for the unwary, as the courts have determined on many occasions’

Author:

Shanna Davison

22 March 2020

Commercial property

Legal

Procurement and contracts

Q: My tenant has served notice to exercise their break clause. What are the conditions of the break, and do they have to comply with the reinstatement clause in the lease?

A: Put simply, it depends on what the break clause actually says. The courts interpret break clauses strictly, so the real question is: what are the conditions the tenant must satisfy to exercise the break successfully? It is usual for the primary condition to be the service of a valid written notice on the landlord to trigger the exercise of a break clause.

It sounds simple, but in addition to complying with any specific provisions in the lease, a tenant should make sure that:

the notice clearly states their own identity, the property and the lease to which it relates
it is addressed to and served on the landlord, or any other person expressly specified in the lease
it is served in accordance with any mandatory service provisions in the lease or, if there aren't any, via a trackable service such as Royal Mail special delivery
it gives the correct amount of notice to exercise the break, taking into account any time between posting and delivery of the notice.

Each of these individual factors can become a trap for the unwary, as the courts have determined on numerous occasions.

Other than service of the notice, the 2007 Code for Leasing Business Premises in England and Wales suggests only three conditions should be agreed when a lease is drafted. These are: the tenant is up to date with the principal rent, not including service charge or other amounts reserved as rent in the lease; the tenant gives up occupation; and the tenant leaves behind no continuing subleases.

That said, many leases contain more onerous break conditions and advice should always be sought. A well-advised tenant should also require an express obligation on the landlord to refund any overpaid rent relating to the period after the break, when it is exercised partway between rent payment dates. However, it is ultimately up to the parties to decide what the conditions should be when negotiating a lease.

It is also usual in commercial leases to have a yielding up clause that sets out what the tenant is required to do when the lease comes to an end. This typically takes one of the following forms:

the tenant is automatically required to reinstate any alterations carried out during the term of the lease
the tenant is only required to reinstate alterations if the landlord has given notice before the termination of the lease that this is required
the tenant is required to reinstate alterations unless the landlord notifies them to the contrary.

The break clause and the yielding up clause are two separate and distinct parts of the lease; however, it is possible that the tenant is required to comply with the reinstatement provisions as a condition of the break. Again, it depends on the exact wording of the break clause, but clear wording is required.

For example, if your break clause requires the tenant to yield up the premises with vacant possession and then cross-refers to the yielding up clause, this is not generally sufficient to make compliance with the latter a condition of the break. The courts consider that the natural and ordinary meaning of drafting in this form is that vacant possession is the only condition of the break. If the landlord requires reinstatement to be a condition of the break, it should expressly say so in the break clause.

That does not mean to say that the tenant is not liable for breaches of the yielding-up clause, only that such breaches will not prevent the successful operation of the break but will give the landlord a claim for dilapidations.

Shanna Davison is a senior associate, real-estate disputes, Hogan Lovells

shanna.davison@hoganlovells.com