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Such clauses are useful where uncertain economic conditions might decrease confidence that a tenant will be able to keep up with their rent payments or obligations.
The means of activating the break clause is through service of a Break Notice. The parties are free to agree the form the Notice will take and how service of the Notice should be made. The Break Notice must strictly adhere to any conditions in the break clause, and cannot be withdrawn, even mutually, once served.
There are a range of considerations both landlord and tenant should be aware of relating to (1) form and service and (2) time limits.
A Break Notice is served in accordance with the agreement between the parties. In most cases, the tenant simply provides notice that they are activating the break clause in their lease. However, the notice must be clear and unambiguous, and a reasonable recipient must be left with “no doubt” as to its meaning, otherwise a court may set it aside. The circumstances surrounding issuance of the Notice can assist in determining its purpose.
Ordinarily, service will be upon the landlord personally at their registered office. A tenant may wish to authorise their solicitor to act as their agent in signing the Notice. The Notice itself must clearly identify the tenant and landlord. It is advisable to conduct a search of the Land Registry to obtain the official address of the landlord.
Tenants are advised to keep meticulous records of service and the requisite accompanying documents, in the event a landlord contests valid execution.
Some break clauses are only actionable by the initial tenant on the lease, known as personal clauses, and cannot be transferred via assignation to a new tenant.
A Break Notice cannot be withdrawn once served, and the effect is to terminate the existing lease. However, the parties may agree to create a new lease with mirrored terms to the previous one. Any arrangements with regards guarantors would have to be re-negotiated.
Time limits are a key impediment to effective service of a Break Notice. Typically, the time period for service will arise every five to ten years rather than rolling month-to-month. Failure to adhere to a time limit may result in the tenant being locked into a financially untenable lease.
A Break Notice will typically be served six months prior to the provided termination date in the Notice.
Service of a Break Notice may also be rendered ineffective due to failure to adhere to minimum conditions stipulated in the clause. These will usually encompass:
(1) vacant possession;
(2) payment of rent and other amounts due;
(3) compliance with lease covenants; and
(4) payment of requisite fees.
Such conditions must be fulfilled by the anticipated date of termination of the lease. In any event, the Break Notice must directly follow any conditions in the break clause.
Vacant possession will require all persons to have left the premises, including any sub-lessors of the principal tenant. Any fixtures or goods owned by the sub-lessor or tenant will also have to be removed prior to the terminate date.
Conditions attached to exercise of a break clause are regulated by a statutory requirement of fairness, in accordance with the Code for Leasing Business Premises in England and Wales 2007. However, courts have rarely used these provisions to disregard a Break Notice condition. Even conditions argued to be trivial, such as painting the premises, are usually upheld by courts. As such, it is advisable to strictly comply with any conditions provided.
Some Break Notices specify a date in between rent payments dates, meaning a tenant may have to continue paying rent up and until the final rent due date despite having terminated the lease. In drafting a break clause, consideration should be had of whether a provision is required for the refund of any rent paid beyond the termination date. If such provision is not made, a court will likely refuse return of any sums paid.
A landlord can waive a condition in the break clause through explicit or inferred conduct. As such, it is important to expressly reserve conditions when corresponding with a tenant. If a waiver is provided “without prejudice”, it may permit the landlord to enforce if the process falls through and a subsequent Break Notice is served. It is possible for a landlord, upon service of a Break Notice upon them, to waive any conditions otherwise impeding termination of the lease.
Failure to properly draft and serve a Break Notice can have dire financial consequences for a tenant, who may become subsequently locked into a contract for several years, or overpay for rent sums after the actual end date of the lease. It is highly advisable to seek the advice of a solicitor before drafting or proceeding to serve a Break Notice. On the other hand, a landlord must ensure their conduct does not amount to a waiver of break clause conditions if they wish to challenge validity of the Break Notice.
At Lewis Nedas, our team of Property Litigation Solicitors have broad experience in both commercial and residential property litigation. We have successfully advised clients with highly complex and multi-faceted cases. To speak with one of our Property Lawyers, please contact us on 020 7387 2032 or complete our online enquiry form.
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