The Importance of Correctly Drafted Break Clauses and Service

Specialist commercial property solicitors in Essex discuss exercising break clauses in commercial leases.

A break clause can be included in a fixed term lease allowing either the landlord of the commercial property or the tenant to terminate the lease early. The break clause may specify one or more dates when it is exercisable or it may be used at any time during the term of the commercial property lease on a rolling basis. This is known as a rolling break. Any conditions attached to the right to break must be strictly adhered to.

A break clause requires careful drafting and will state who may operate the right to break. Conditions may be specified in order for the break clause to operate and can include all or a selection of the following:  

a)  The tenant must have paid all of the rent or all payments due under the lease;

b)  The tenant must have performed all of its covenants;

c)  The tenant must not be in material breach of its repairing covenants;

d)  The tenant must give vacant possession of the commercial property.

The break clause should specify whether the conditions must be satisfied at the date of service of the break notice or at the break date, or both.

If the lease prescribes a particular form of notice to exercise the break, it must be used in order to validly effect the break notice. A break clause may contain express provisions for dealing with the service of the break notice and in this event, the party seeking to serve notice of the break must comply with these provisions. It is important to consider the requirements of the relevant clause and whether those requirements have been satisfied, it is always advisable for a party to protect its position by keeping evidence of its compliance. This was considered in the case of Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] and the court held that “if the [notice] clause had said that the notice had to be on blue paper, it would have been no good serving on pink paper, however clear it might have been that the tenant wanted to terminate the lease” and in light of the comment on this case shows the particular importance  for the parties to strictly comply with the notice requirements and the courts strict stance on this issue.

Generally, a notice served by the wrong person or on the wrong person will be invalid. This issue was explored in the case of Standard Life Investments Property Holdings vs W & J Linney Ltd [2010] where the tenant under the commercial property lease served notice on a party which was not its immediate landlord. The High Court held that the notice was invalid. Whilst it may appear clear who the tenant should serve a break notice on, this particular case highlighted some of the pitfalls in serving a break notice; the landlord, Capita, in this instance granted an overriding lease to Standard Life for a term longer than Linney’s lease. The effect of this was that Standard Life became Linney’s landlord and rent was now payable to them. Unfortunately, the tenant served notice on their original landlord, Capita.

We would always advise you to seek legal advice in respect of the drafting of a lease & break clauses and the service of any break notices. This is to ensure that these adequately meet your requirements and that you comply with the correct requirements of the break clause whether you are a landlord or tenant of a commercial property; otherwise the right to break may be lost and as a tenant, liability under the lease would continue for the remainder of the term.