In an uncertain economy there is usually a spike in the exercise of break clauses, with tenants seeking to negotiate more favourable lease terms or even extricate themselves fully from properties with untenable rents or surplus space.
This spike inevitably leads to an increase in litigation, with cases most commonly arising from defects in or service of break notices and issues relating to compliance with preconditions.
While the flexibility of break options seems to benefit tenants alone, landlords are inclined to agree to their inclusion in a new lease to attract and secure good-quality tenants.
The risk can then be mitigated by ensuring that the right to exercise the break option is personal to the original tenant rather than extending to also protect any future assignee tenants.
However, a landlord could also seek to include within the lease its own break right – if, for example, it has plans for redevelopment and therefore requires flexibility with the property.
In a recession, a tenant vacating a property could mean the difference between a landlord staying afloat or going out of business. Faced with the difficulties of reletting and liability for empty business rates, landlords are likely to be poring over the small print of leases and the break notice itself looking for areas to challenge in the event that the tenant exercises their option.
Case law has established that any conditions attached to a break clause must be strictly observed unless these are waived by the landlord. Therefore, non-compliance is a common pitfall for tenants and a heavily litigated area. The most common conditions are as follows.
In the current landscape, landlords are also looking to maximise opportunities with their property investments, and they will also exercise breaks in order to do so. However, the inclusion of a break in a lease made under the Landlord and Tenant Act 1954 does not allow a landlord to circumnavigate a tenant's statutory protection.
The lease is still subject to the termination provisions of the Act, so any break notice served by a landlord will only end the contractual term of the lease – and not the statutory protection afforded by the Act. A landlord wishing to terminate the tenant's continuation of tenancy under the Act will still need to serve a section 25 notice opposing the grant of a new tenancy
Though it will depend on the drafting of the break clause, it is sometimes possible to serve just one notice. However, it is often advisable to break explicitly by serving both a notice under the lease and another – separately – under the 1954 Act.
One of the most common grounds for a landlord to seek to end a tenancy protected under the 1954 Act is redevelopment, which must meet all the elements of ground (f) of section 30 of the Act – demolition, substantial work of construction or reconstruction.
Often a contractual break will mirror a statutory one on ground (f); however, a key difference will be the timing of when a landlord has to prove its firm and settled intention to redevelop.
Under the Act this will be at the court hearing, but under a contractual break it may be much sooner. It will ultimately come down to the drafting, but firm evidence of the landlord's intention to redevelop is usually required either on service of the contractual break notice or by the break date itself.
The evidence needed to prove this intention is usually the same for both; that is, all planning permissions and consents are obtained, and any financing necessary for the redevelopment is in place. However, it could be challenging for the landlord to have obtained all documents if this they are required to do so at the date the notice is served.
Given that this is a notoriously thorny area of property disputes, well-advised tenants will try to agree a surrender with their landlords to avoid any argument about compliance with complicated preconditions.
This can be neatly tied up with a dilapidation's settlement agreement in which the landlord waives any pre-conditions and agrees the lease will terminate on the break date – or another agreed date if preferable to the parties – in exchange for the tenant agreeing to pay a financial sum to the landlord in full and final release of its dilapidations liability – the breaches of repairing and yield up covenants under the lease.
If you need support to ensure you comply with break preconditions or are seeking to challenge them, though, you should contact an experienced legal team beforehand.
Related competencies include: Landlord and tenant, Leasing and letting, Legal/regulatory compliance