Goodman Derrick LLP’s Chloe Benson advises on the pitfalls to avoid when looking to exercise a break notice within a commercial lease.
Landlord and tenant relationships on the high street are under strain. Many retail tenants, particularly in the fashion world, are moving online and reducing the number of stores from which they operate. It will come as no surprise, therefore, that an increasing number of retail tenants are looking to exercise their break right.
How should a lease break notice be exercised for it to be effective?
It is not as straightforward as one might expect and there are plenty of traps for tenants to fall into. Often it is only after the event when a tenant realises that the one-line email which it sent to the landlord does not constitute valid written notice under their lease. By that stage it could be too late, resulting in potentially disastrous consequences and the risk of being tied into the lease for the remainder of the term.
Factors to consider in advance of serving a break notice in a lease
Fashion retailers that are considering exercising a break clause would be well advised to check the terms of their lease from an early stage to determine the following:
- Is it a rolling break or a one-off break?
- How much notice needs to be given?
- Who is the landlord? Has there been a change in ownership?
- Is the landlord based in the UK or abroad?
- How does notice need to be given? Are there specific service provisions under the lease?
- Who is “the Tenant”? Are there joint tenants?
Break Clause Conditions
A further consideration for fashion retailers is whether there are conditions that need to be complied with. Failure to comply with pre-conditions will mean that the break has not been validly exercised.
Most commonly, a break clause is conditional upon the tenant giving vacant possession on the break date. Three key points are to ensure that:
- the landlord can assume and enjoy immediate and exclusive possession on the break date. It may sound simple, but make sure that all sets of keys are returned and all your stock has been removed;
- there are no people on the premises at the break date. This includes trespassers, subtenants and any workmen carrying out repairs; and
- the premises are empty of chattels that substantially prevent or interfere with the enjoyment of the landlord’s right to possession. You will need to check whether certain alterations (such as partitioning) need to be removed before the break date.
Another common precondition is payment of all rent, service charge and other sums up to the break date. It is therefore advisable to check:
- that all payments have been made on time;
- whether interest or VAT is outstanding;
- whether the break date falls in the middle of a quarter. If so, is there an apportionment clause? If not, you will need to pay the full quarter’s rent;
- whether there a break clause penalty that needs to be paid.
A word of warning – what if a tenant changes its mind after serving the break in a commercial lease?
It has been a relatively common theme of late for retail tenants to exercise their breaks with a view to renegotiating terms. Quite often they will succeed, as understandably, landlords would prefer to have a tenant in situ rather than the risk of an empty unit and a business rates liability.
One point worth noting is that a break notice cannot be unilaterally withdrawn once it has been exercised. If a tenant changes its mind and wishes the lease to continue, it may choose to deliberately fail to fulfil a condition. However, do bear in mind that even if a tenant deliberately fails to fulfil a condition, a landlord retains its right to waive the break clause conditions. It is therefore crucial to consider matters carefully before exercising your break option.
Chloe Benson is a senior solicitor in the property team at Goodman Derrick LLP, the London law firm.
