Reminder Warning on Break Clauses
- Residential Property
- 1st Jun 2021
By Stephen Attree
MLP Law
Following on from our series of observations on commercial property matters as the country moves further out of lockdown, tenants will already be thinking of the future and as to whether or not the current property “is fit for purpose”. If property changes are needed and the tenant is lucky enough to have a lease with a break clause, then here are some reminders as to considerations affecting the effectiveness of the break clause. These considerations will also apply where tenants are entering into new leases or renewing leases of which a break clause is part of the agreed terms.
We are finding that some clients are already in discussions with their landlords and agreeing terms. We then see heads of terms in which the conditionality to break clauses need revision, as “traps have been sprung”.
What to look for:
• All rents – the conditionality that all rents have to have been paid by the break clause is adverse for a tenant. Annual rent is defined. You know when it is to be paid, and can police that. Other sums due under the lease that may be defined as “rents” are perhaps not known. Insurance rent should be known, although that will be dependent on being notified by the landlord. Service charge payable on a quarterly basis will also be known and should be paid. Other sums, such as ad-hoc service charge, or even interest payments on sums that may be late, are not necessarily known.
– There is no obligation on the landlord to remind the tenant of any sums potentially due under the lease and interest payments which have not been notified still remain due.
• Quarterly/monthly annual rent payments – the case of Marks & Spencer plc –v- BNP Paribas Securities Trust Company (Jersey) Ltd & Another (2014) illustrates when internal accounting practices may breach lease terms. Once a break clause notice has been served tenants sometimes apportion the annual rent payable for the period from a particular rent payment date to the break date. Unless the timing is such that a full rent period (e.g. a quarter) expires on a Break Date ( the date when the lease ends after a validly exercised Break Notice) apportioning the rent to be paid rather than paying the full rent due , is dangerous. .More often a break date would be within a particular rent period. The apportionment of the annual rent payable on the rent payment date immediately preceding a break date would mean the tenant has failed to satisfy the conditionality regarding payment of annual rents due. The break clause would not have been validly exercised.
– A full period’s rent should be paid to a landlord in accordance with the lease terms.
– A well-drafted break clause should provide that the landlord reimburses the tenant for any rents paid by the tenant to the landlord for the period post the break date.
• “To comply with all tenant’s covenants” – it is still surprising to see the conditionality that the tenant has to have had complied with all its obligations under the lease. There is most likely something under the lease that the tenant has failed to do. It could be decorating with two coats of paint rather than three, as an example. The point on interest above is another example. A tenant’s accounting department may not realise that the landlord has received the rent a day or so later than required. Due to the timing, interest may be due.
Unless a landlord is in a particularly dominant position in negotiations and can dictate this conditionality, the tenant should be aware that its effect could be to make the break clause exercisable and thus potentially worthless.
There are other considerations to be borne in mind, which we are happy to discuss further should any negotiations be ongoing.
If you have any questions or queries in relation to this blog, please do get in touch – by telephone on 0161 926 9969 or by email to Johnl@mlplaw.co.uk
About the expert
Stephen Attree
Managing Partner
Stephen is the Owner of MLP Law and leads our Commercial, IP and Dispute Resolution teams which provide advice on all aspects of the law relating to mergers, acquisitions, financing, re-structuring, complex commercial contracts, standard trading terms, share options, shareholder and partnership agreements, commercial dispute resolution, joint venture and partnering arrangements, IT and Technology law, Intellectual Property, EU and competition law, Brexit and GDPR.
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