Give me a break

Breaking free iStock 000005355501XSmall 146x219Julie Roberts looks at recent court cases that examined the obligations imposed by break clauses.

Break clauses, the mechanism to allow one party to a lease to bring the lease to an end before the expiry date, are a common feature in commercial leases but their attempted exercise by tenants continue to be challenged by landlords before the courts. Most break clauses will contain pre-conditions and the courts regularly uphold the principle of requiring strict compliance with them.  

It is not uncommon for tenants’ break rights to include a pre-condition stating that in order for the break notice to take effect at the break date the tenant must have fully complied with all its lease obligations.

Two of the more common obligations have been considered in recent court cases.

Vacant possession means vacant possession

Vacant possession to be given on the break date. The case of NYK Logistics v Ibrend [2011] highlighted some key points about the tenant’s responsibility when delivering up premises pursuant to a break clause.  

The court found that ‘vacant possession’, in the context of the break clause, had the same meaning as in every domestic and commercial sale in which there is an obligation to give vacant possession on completion. At the moment when vacant possession is required to be given, the property must be empty of people and the purchaser must be able to assume and enjoy immediate and exclusive possession, occupation and control of it. The property must also be empty of any remaining chattels that would substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property.

When providing vacant possession, tenants must ensure that any underleases or other rights of occupation granted have been terminated and any third parties have vacated the property by the end of the term of the lease. This obligation would include removing any trespassers.  

All payments have been made in full

All sums due under the lease have been paid. This is not limited to the payment of rent, but other sums the tenant is required to pay such as service charges, insurance rent and any other sums payable by the tenant mentioned in the lease.

The issue of payment of rent was considered in the case of PCE Investors Ltd v Cancer Research UK [2012].

The lease contained standard payment provisions requiring rent to be paid quarterly in advance, however, the break notice was expressed to terminate the lease earlier than the expiry of the current quarter.  

The tenant therefore apportioned the quarter’s rent up to the stated date of termination instead of paying the full quarterly advance rent as the lease required. It was held that the resulting shortfall invalidated the tenant’s break notice because the tenant had not paid the landlord all rent which was due to it at the stated termination date.

What happens if the tenant gets it wrong?

Failure to comply with each and every obligation can be costly for the tenant as they will be held to the terms of the lease until the end of the contractual term or until another break right arises and is validly exercised. The above cases serve to emphasise the benefits to the landlord, particularly when the rental market is poor, to challenge such notices.

Julie Roberts is Section Leader for Property at Essex Legal Services.