I recently acted for a commercial tenant company in a matter which highlights the importance of planning ahead and having a full understanding of the terms of a lease.
The tenant had previously traded from various commercial properties and largely as a result of good relations with its landlords had never encountered any difficulties when trying to exercise a break option under a lease. On this occasion the tenant, being aware of the break clause in the lease, acquired new premises and began to make arrangements to move to the new unit following the scheduled break date.
The tenant served the break notice within the timeframes provided and paid the necessary premium, satisfied that all rent and other sums due under the lease were up to date and that there would be no difficulty clearing the unit by the break date.
Around six weeks before the break date I was instructed as the landlord had suggested there were amounts outstanding under the lease and also that there were significant dilapidations. Upon reviewing the papers and taking instructions, it became clear the landlord was trying to frustrate the break.
Exercising the break option was conditional on the tenant having complied with all tenant covenants. The landlord had been in no rush to draw the issues to the tenant’s attention, and was quite happy to sit back and wait for the break date to pass. In the current climate landlords are more commonly adopting a similar approach as commercial rents are a valuable source of income and when coupled with the saving on business rates it pays to have a tenant in occupation.
Had the landlord succeeded in frustrating the break, the tenant would have been responsible for the liabilities under two leases. There was every chance the tenant would have gone out of business and more than 50 employees would have been left jobless.
The courts have historically interpreted break clause conditions strictly in favour of landlords. Even the smallest instance of disrepair could prevent a break. On this occasion the only realistic way to guarantee the break was to come to an agreement with the landlord for a lump sum to be paid in lieu of the dilapidations, in return for the landlord agreeing the break in writing.
Ultimately a favourable instalment settlement was reached and the client was able to ensure the break and a smoother transition to its new premises. Had the tenant left it any later to obtain legal advice there may not have been enough time to conclude settlement terms.
In these circumstances tenants should make sure the terms of the lease are strictly adhered to. Some break clause provisions are not as onerous as in this example but there are other pitfalls relating to the service of notice, payment of any premiums and leaving the unit in vacant possession.
Where a break clause is conditional on compliance with lease covenants, it is prudent to start thinking about dilapidations at least 12 months before the break date so there is time to agree with the landlord, if possible, the scope of works to be carried out, or where agreement cannot be reached, there is time to consider how best to protect the ability to break.
by Daniel Long
If you have any queries on the above then please call Mr. Daniel Long, at our Bury office on 0161 761 4611