What is a break clause?
A break clause can be included in a fixed-term lease allowing either you or your landlord to terminate the lease early.
Exercising a break clause brings the lease to an end. However, where the landlord breaks the lease, there is legislation in place that may allow your business to remain in the property after the lease has ended.
Depending on how your lease has been drafted, the right to break the lease may arise on one or more specified dates, or it may be exercisable at any time during the term of the lease on a rolling basis.
Conditions of a break clause
A break clause may only be exercised if any conditions attached to it have been satisfied. A break clause will be strictly construed by the courts and any conditions must be strictly performed.
The most common conditions of a break clause are:
- the annual rent has been paid up to the break date; and
- vacant possession of the property must be given on the break date.
An obligation to give vacant possession puts an obligation on the tenant to:
- make the property available so that the landlord can both physically and legally occupy it; and
- give the landlord undisturbed enjoyment of the property
A break clause may also be conditional upon the tenant complying with its covenants in the lease. When acting for the tenant, this must be resisted as a subsisting breach of covenant or condition in the lease at the relevant time will prevent a tenant from exercising its break regardless of how trivial the breach.
Can a landlord waive the conditions in the break clause?
The doctrine of waiver is where a person can give up their legal rights. This can be inferred by actions or be made in writing or verbally.
For the landlord to waive the conditions in the break by its conduct, the landlord must take possession of the property after the break has been exercised and it must also:
- know all the material facts;
- have the right to choose whether or not to waive the conditions; and
- know the legal effects of making each choice.
NYK Logistics (UK) Ltd v Ibrend Estates BV [2011]
The case of NYK Logistics (UK) Ltd v Ibrend Estates BV [2011] serves as a harsh warning to tenants looking to exercise their break clause with pre-conditions.
In this case, the lease allowed the tenant to terminate its lease on the break date provided that on the break date the rent had been paid up to date and vacant possession was give by the tenant. The break clause also allowed the landlord to waive the pre-conditions of the break however there was no obligation on the landlord to do so.
The tenant served a valid break notice however to save on and control the costs of repairs and to avoid a dilapidations claim for damages, it decided to carry out repair work itself. The tenant did not have to carry out the repairs as a condition of the break.
Unfortunately, the work was not completed by the break date and the tenant sought from the landlord an extension of time to continue the repairs. The landlord failed to respond. Two workmen employed by the tenant and a security guard, also employed by the tenant, remained at the property to finish the repairs.
HELD: To satisfy the vacant possession condition in the break clause, the tenant had to give vacant possession of the property to the landlord by midnight on the break date. What the tenant should have done is moved everyone out of the property by midnight on the break date and returned the keys to the landlord. The day after the break date, the tenant could have then contacted the landlord to ask whether it can return to the property to complete the outstanding works. The occupation by the tenant following the break date would have then been as a ‘licensee’.
Practical issues for a tenant to consider when exercising a break clause
- Once a break notice has been served it cannot be withdrawn unilaterally, so make sure that you are certain that you intend to break the lease. Any mutual waiver of the notice will be deemed to constitute the grant of a new lease, which takes effect from the date of expiration of the break notice.
- Make sure you comply with all the relevant requirements in the break clause and keep evidence of your compliance to help protect your position.
- Ensure that you serve the break notice in good time and strictly in accordance with the terms of the lease.
- Keep evidence of the method of posting or delivery of the notice. If there are no service provisions in the lease, you could request that your landlord acknowledges receipt.
- If the notice is being served by an agent, make sure your landlord is aware of the existence of the agency and its authority.
- Consider carrying out a compliance audit with your surveyor’s advice before serving the break notice. You can then take steps to remedy any breaches to ensure compliance with its covenants.
- Pay any outstanding sums due, even if these are in dispute. Payment can be made on a “without prejudice” basis and the matter disputed later.
- Ask your landlord for confirmation of the steps you need to take to comply with any conditions. You could ask your landlord to prepare a schedule of dilapidations in relation to any repair works. A schedule of dilapidations is a list of items that are in need of repair and which you have responsibility for, due to the repairing obligations under a lease.
- If you agree to carry out works to the property before the break date, be careful to ensure that the works are completed and vacant possession is given by the break date.
- Consider asking your landlord to accept the break notice on payment of an agreed amount as liquidated damages in relation to any outstanding breaches of covenant. Liquidated damages are a fixed or determined sum agreed by the parties to a contract to be payable on breach by one of the parties.
- Ensure that any waiver of a condition by your landlord is not made “without prejudice” and that it is clear to which condition(s) the waiver applies.
More information
If you have any queries about the content of this checklist, please contact Protima Sikdar Wood on 020 8971 1042 or email Protima.Sikdar-Wood@morrlaw.com
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