Break Clauses – Tenants Beware!!!

A tenant break clause allows a tenant to terminate their lease early and give them the flexibility to react to market conditions and changing needs, such as downsizing, upsizing or moving when premises have become unaffordable or over-rented. Consequently, it has become relatively commonplace for tenants to negotiate the inclusion of such break clauses when negotiating new leases.

However, break clauses are rarely straight forward and it is not uncommon for a break clause to be subject to certain conditions for the tenant to adhere to and therefore, it is always advisable for a tenant to pay close attention to all requirements of the clause and to follow those requirements with due care and attention.

Common clauses include “service of notice within a given timescale”, “payment of all sums due” (including rent, service charge and insurance) and “compliance with tenant covenants” (including repairing covenants).

It has also been relatively commonplace for such conditions to be complied with and met “at the effective break date”. However, just to complicate matters further, it is now apparent that tenants may need to pay even closer attention to the wording of a break clause to establish when such conditions may apply. This has been highlighted in the recent case of Siemens Hearing Instruments Ltd v Friends Life Ltd 2014) EWCA Civ382; (2014) PLSCS 136 as depending on the wording of a break clause, such conditions may also apply at the date of the service of notice as well as the break date.

In this particular case the tenant held two leases, both expiring in 2023, which included break clauses that enabled the tenant to bring them to an end in May 2013. The break clauses required the tenant to serve 12 months’ notice and stipulated that the tenant should not be in breach of any of its obligations “at the date of service of such notice and/or the termination date”. The tenant served its break notice, but the landlord continued to demand rent after the break date, claiming that the lease remained in force, because the tenant was in breach of its repairing obligations when the break notices were served.

The tenant admitted that it had not fully performed its repairing obligation on the date of service of the notices, but argued that they had subsequently put the premises in to proper repair by the effective break date and consequently the lease should terminate at the break date when there was no default of any kind. However, the Court agreed with the landlord’s argument that the condition in the break clause was included to enable the landlord to market the premises in proper repair during the 12 month notice period and hence the leases should remain effective and the tenant should remain liable for the remainder of the lease term.

This case not only highlights the importance for tenants to pay close attention to the wording of a break clause when seeking to exercise such an option, but it also highlights the risk of accepting such conditions! So tenants - BEWARE!!!

Landlords and tenants should seek professional advice on the terms and possible consequences of break clauses.

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