Whilst commercial premises can bring great advantages to SMEs, they can also bring risk when times are not so good. The rent on commercial premises is likely to be one of the biggest overheads for any SME, added to which there will be liabilities for the repair and maintenance of the premises.
Having the benefit of a tenant’s break option in the lease can provide much-needed flexibility, or indeed a lifeline, to a business. It may also help establish a strong negotiating position for agreeing rental concessions with the Landlord in more challenging times.
On the face of it, if the lease says the tenant can terminate early by exercising the break option, then this would appear to be a relatively straightforward matter of notifying the landlord of your wish to do so. However, exercising break options correctly is notoriously tricky, and mistakes are often made, as evidenced by the numerous cases involving disputed attempts to exercise break options.
In this blog, we look at some of the key issues tenants need to be aware of.
1. The break notice must be served by and on the correct person or body corporate, as stipulated in the lease wording, otherwise it risks being invalid. So, for example, if the tenant is more than one person, all of them need to serve notice.
2. Any pre-conditions to exercising the break option must be strictly adhered to. Each lease must be read on its own terms, the most common examples include:
- Rent and other sums due under the lease must be paid up to the break date, even if not demanded by the landlord. “Other sums” will include service charge, insurance rent and default interest.
- Time is of the essence when it comes to serving break notices. The lease terms stipulating when the notice is to be served must be strictly adhered to, otherwise notice risks being invalidated. Mistakes are often made on this.
- The tenant must have complied with its other covenants in the lease, such as those relating to repair and decoration. In one case, the tenant’s break notice was invalid, because it had redecorated a few weeks before it was obliged to under the lease. It is on these sorts of small technicalities that attempts to exercise break options fail.
- Vacant possession of the premises must be given on the break date. Failure to do so potentially invalidates the exercise of the break option and the tenant then remains on the hook for the residue of the term. However, the meaning of vacant possession is not always clear cut and the tenant would be well advised to take legal advice as to what vacant possession means in the context of its particular lease and circumstances.
3. Close attention needs to be paid to the provisions in the lease as to how to serve the notice effectively. For example, does the lease stipulate by what method the notice is to be served and is there a specific format the notice must be in? No matter how mundane these conditions may seem, failure to comply with them strictly can invalidate the notice.
4. Once the tenant has served its break notice, it cannot then unilaterally withdraw it. A tenant, who is motivated by a desire to put pressure on the landlord to agree or secure other concessions needs to be mindful of this.
- If the lease requires it as a precondition to breaking the lease, pay the full quarter’s rent and any outstanding sums due. Take legal advice if any sums are in dispute, or the break date falls during a rental period.
- Consider carefully what other preconditions there are to exercising the break, particularly in the context of COVID-19. If vacant possession and delivering up the premises in repair and decoration are required, can this be practically achieved in the context of the Lockdown?
- Check for evidence of previous late payments and whether default interest may be due on them. If so, include a sum to cover such interest.
- Consider instructing a surveyor to advise on what repairs need to be carried out prior to exercising the break option, to ensure compliance with repair covenants.
- Carefully check the lease provisions as to how the notice must be served and take legal advice, if in doubt. Keep documentary evidence of service of the notice.
As detailed above, this apparently simple exercise has many potential pitfalls for tenants. Taking a small amount of legal advice could avert a significant and costly mistake.
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The author of this blog post is commercial property lawyer Philippa Cobb.
Philippa worked for many years in London in private practice, advising a variety of SMEs in relation to their commercial property interests, as well as acting for property developers and investors. Following a relocation to Exeter, she then enjoyed an in-house legal role for 10 years with the University of Exeter, advising on a broad range of real estate matters.