Landlords and tenants often include break clauses within heads of terms – the commercial arrangement is that one or either party can terminate the lease and exit the property. However, conditions attached to break clauses can often mean that in reality a break clause is unworkable and the intention of the parties (i.e. that the lease can be terminated) isn’t reflected in the final document.
The courts have historically taken a very literal interpretation of break clauses and have been reluctant to get too involved in the interpretation of break conditions. They tend instead to focus on the words that are contained within them and their normal meaning. Below are some examples of situations where break clauses didn’t quite go to plan for both landlords and tenants and our top tips on how to avoid making the same mistakes.
In a recent case, a break clause stated that the landlord could terminate the lease ‘at any time’ on two months’ notice if the tenant failed to either: commence redevelopment works within six months of the date of the lease; or complete the development before May 23, 2018.
The tenant didn’t complete the works in time, so the landlord exercised the break clause. The tenant argued that the landlord never had the right to exercise the break clause as they had completed the development by the time the landlord served the notice. Nevertheless, they argued that notice should have been served within a reasonable time, not at any time.
The court found that the break notice had been served effectively. The wording ‘at any time’ was clear and unambiguous and to imply that this should have been ‘reasonable’ would go against the express terms of the lease.
In another recent case, a break clause gave the tenant the option of two different break dates. One of the conditions was that the tenant must give vacant possession to the landlord on the relevant break date.
The tenant exercised the break clause on the second break date and subsequently removed key features of the premises including ceiling tiles, lighting and heating. The landlord argued that the tenant had not given vacant possession of the premises as the definition of ‘premises’ included ‘all fixtures and fittings at the premises whenever fixed’.
The court found that the break clause had been exercised effectively. There was no requirement for the tenant to comply with the other covenants of the lease in order for the break clause to operate, and, therefore, they were only required to return the premises as they were on the break date free of people, chattels and interests.
In a slightly older case (but still relevant nonetheless), a tenant brought a claim for the court to determine the exact conditions of a break clause which stated that the tenant could end the lease at the twentieth year of the term on not less than 12 months’ notice subject to the tenant giving vacant possession. A subsequent clause stated that on expiration of the notice, the tenant should yield up the premises in accordance with clause 11 (which stated that any alterations must be removed and the property reinstated).
The court found that on the natural and ordinary meaning of the break clause, there was only one condition: vacant possession. If the landlord had wanted strict compliance with clause 11 as a condition for the break, this should have been made clearer in the break clause itself.
So, our top tips for a clean break?
- Be clear on your conditions and understand what they mean in real life
- Don’t leave room for ambiguity in the drafting (or better still ensure that your lawyer does not leave ambiguity in the drafting)
- Make sure that the break clause (and any associated conditions) clearly reflects the intentions of both parties
Howes Percival’s commercial property solicitors provide a full range of services for landlords and tenants including commercial leases, property portfolio management and dispute resolution. For more information, contact Marcus Carter on 07814 356928 or at email@example.com