News
20 January 2010
Break Clauses – Vacant possession with strings?
In the current market, many tenants are taking advantage of a break clause to serve notice to end a lease negotiated in better times and landlords are being left with the prospect of a vacant unit in a difficult market. To reduce the chances of this happening, you should scrutinise break notices and break clauses more carefully with a view to keeping your tenant on the hook.
We have seen a growing number of disputes concerning break clauses, which are particularly contentious where the break is subject to conditions which must be complied with before the tenant can break the lease. A lease will often expressly provide that the tenant has to give vacant possession, have paid all the rent and have materially complied with the lease covenants as at the break date. Taking the three conditions in turn, issues may arise as follows:
- Vacant possession – this means that the tenant must have removed all their belongings and you must be able to occupy the premises without difficulty or objection. Whether vacant possession has been delivered up is a question of fact and degree in every case. Even if the lease does not expressly provide for the tenant to give vacant possession, this can be implied.
- Payment of rent – most commercial leases require payment of rent in advance on the usual quarter days. If the break date falls part way through the rent quarter, does the tenant have to pay the full quarter’s rent due or can he merely pay the rent calculated through to the break date? Regrettably, the answer is obscure and the cautious tenant should pay the rent for the full quarter to avoid the risk of invalidating the break. It is worthy of note however, that it is unclear as to whether the tenant can then recover that part of the rent relating to the period after the break date, without express provision in the lease to this effect.
- Compliance with lease covenants – this condition is difficult from a tenant’s perspective. Repair and reinstatement of alterations are two areas of concern. A specialist surveyor can advise on the work necessary to bring the premises to the standard required by the lease but even then, as a landlord you may question whether the work is sufficient. You are not obliged to inform your tenant before the break date whether you believe that the works are adequate or what works you will expect. It is wise not to harm your position unwittingly by assisting the tenant in this respect; in many cases some uncertainty will therefore remain until the break date.
If the lease requires strict compliance with the tenant’ covenants, then a tenant will not have complied if it has painted a property with two coats of paint when the lease required three. Most leases however will require material compliance, assessed by reference to whether the property can be relet without additional delay or expense. In the current market, it is more difficult to prove that the state of repair will cause additional delay in reletting, but additional expense can be proven as it can be argued that because prospective tenants have a greater choice of properties, you will need to present the property in full repair. If you have to do the works, or if a longer rent-free period or a lower rent must be offered owing to the state of repair, then that will result in additional expense. Whether that additional expense is significant enough to be material will depend upon quantifying the expense and analysing it against the rent.
In a buoyant market, you may be less likely to want to retain the tenant because you may be able to relet relatively quickly. In today’s market, the break clause becomes more crucial and parties are more willing to dispute points that they would otherwise waive. Specialist legal and surveying advice should be taken at an early stage. Where the break is conditional, a wise tenant may try and agree a surrender of the lease with you, but in any event, should take compliance seriously and act early.
If you do have a problem with a tenant who has not complied with the terms of their tenancy agreement or if you wish to revise your terms for future tenants, please contact Jacqueline Morris or Adele McDermott on 01782 205 000.
We also advise commercial tenants regarding problems with their landlord.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.
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