Tenants should think about the conditions of a break clause well in advance, especially when repairs are required.
Often found in commercial leases, a break clause is an option allowing termination of a lease before expiry of the lease term. For example, a break clause in a lease might give the option to the tenant to end a ten- year lease early, at year five.
Leases can contain break options for landlords and/or tenants. Where a tenant has the option to break, this can be conditional on the tenant fulfilling certain obligations under the lease. It is also common for there to be a deadline or a window by/within which the break option must be exercised. There might also be specific requirements as to how a break notice must be served. Tenants sometimes think they have served a valid notice, only to discover that they failed to comply with one of the conditions or deadlines. This can mean they’ve lost that opportunity to break the lease early, meaning they might be tied-in to the lease for many more years, with significant financial implications.
Examples of break clauses
If you are a tenant that has the benefit of a break option, the first thing to do is to read the break clause and the lease very carefully. What are the conditions and when and how must the break notice be served? Do this well in advance and seek legal advice so that you can be sure you will be validly exercising the break option. This is particularly true where the break option might require the tenant to carry out repairs. You might also need a surveyor’s advice about repairs.
The lease may well require the tenant to carry out repairs as part of the tenant obligations. If there are repairs required (dilapidations) at the time of serving the break notice, and if the break clause requires the tenant to be in compliance with all the tenant obligations in the lease in order to serve a valid break notice, dilapidations can invalidate the break notice.
If you only start thinking at short notice about what you need to do to serve a valid break notice, you might run out of time before the deadline to serve the break notice. You might need to have a survey carried out, a dilapidations schedule prepared, advice provided as to what works you need to do in order to discharge your repair obligations, time to negotiate with your landlord (if appropriate) to settle the dilapidations, or to get any works done if.
Sometimes tenants can be in a difficult position, because they might get the works done which they believe they are liable to carry out, serve their break notice, but the landlord might reject it on the basis that they are still in breach of their repair obligations. A dispute about the extent of the repair obligations could then arise. If it cannot be resolved, ultimately a court would have to decide whether they tenant had complied with its repair obligations, and consequently, whether the break notice was valid. Unfortunately, there is no mechanism by which tenants can apply to the court before starting the works, for the court to confirm the extent of those works.
A tenant tried this approach in the case of Office Depot International (UK) Limited v UBS Asset Management (UK) Limited & others  EWHC 1494 (TCC) The roof of a large warehouse was in disrepair. The background was not straightforward as the roof had leaked since construction and the tenant had claims against the landlord and developer of the property, but the key point to come out of this case is about when the court is prepared to become involved in this type of claim if there is not, on the face of it, any dispute. In advance of doing the works the tenant wanted clarity before embarking on a large programme of works, as to what it was obliged to do to put the roof into repair under the lease. The tenant issued a claim seeking a declaration which would bind the landlord, as to whether it was obliged to put the roof of the warehouse into repair and if so, by what means.
The landlord applied to strike out the claim on grounds that the tenant was not entitled to adopt a position of neutrality and could not leave it to the court to decide whether there was a breach and if so, what was required to remedy it. The landlord also said that the tenant’s claim for a declaration, in advance of works being carried out, that a particular scheme of works would satisfy its obligations under the lease with regard to the roof defects, was misconceived. This was because in covenanting to keep the roof in repair, the tenant takes the risk of a particular scheme of work not being satisfactory once carried out. If the tenant got its declaration, the risk of any additional repairs then being required would pass to the landlord.
The judge concluded that the tenant’s claim did not raise any dispute as to the remedial works required to be carried out because the tenant did not advance a positive case. The tenant was asking the court to state what works the tenant was required to do to comply with the lease. In other words the tenant did not put forward its own position of what works it said were required, or what works it had already done, and the landlord did not disagree with the tenant’s position, because there was no position to disagree with. The court said it was not for them to conduct an inquiry as to the most appropriate scheme of works, it was only appropriate in this type of case for the court to decide between competing positions adopted by the parties.
Aside from dilapidations, legal advice can be useful when exercising a break notice to avoid falling foul of conditions about the timing of the notice, or the method of service. A small slip on a technicality of this nature could lose you the right to exercise the break.
Whether you are a landlord or a tenant, for advice on this and a range of other commercial property matters, speak to Sarah Coates-Madden.