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Tenant Break Options

  • Northern Ireland

    01-12-2020

    Please note: This is the first briefing in our Northern Ireland Real Estate - Four-part 'bite-size' series

    When acting for tenants we will encounter three main types of break clause drafting:

    • A balanced break (which generally follows that of the model commercial lease);
    • A tenant friendly break (usually with no or very few pre-conditions); and
    • A landlord friendly break (with several pre conditions, some often open to interpretation)

    The market standard position is that any tenant break is implicitly conditional on the tenant paying all basic rent and giving back possession of the property with no lawful third party occupiers.

    It is worth noting that if a landlord wants stricter break conditions (eg provision of projected turnover statements, specific yielding up requirements, etc.) then these should be outlined clearly at Heads of Terms stage as they are often a contentious point when lease negotiations begin.

    What is acceptable?

    With this in mind, when acting for a tenant in the negotiation of a break clause, the following conditions can generally be accepted:

    • a specified amount of prior notice in writing to be given to the landlord;
    • the main rent being paid in full up to and including break date;
    • the property being given back to the landlord free from the tenant’s occupation and free of other lawful occupation without any continuing underleases; and
    • payment of a break fee/premium on or before the break date (if specifically agreed between the parties).

    What is not acceptable?

    The following conditions should be resisted:

    That all rents due on or before the break date have been paid in full to the landlord

    Depending on the drafting of the lease and the definition of “rents”, this pre-condition can cause serious issues for a tenant. It may be required to pay not only the main rent, but also any turnover rent, insurance, service charge and any interest that might be due on late payments owed up to the break date.

    The onus will be on the tenant to ensure that the landlord provides a statement (in good time) detailing the amount of any payments due. From a practical perspective this is far from ideal and gives the landlord a wide scope to invalidate a break option.

    The case of Avocet Industrial Estates LLP v Merol Ltd should serve as a cautionary tale to tenants and their advisers. In this case the landlord had let a commercial premises to the tenant for a term of 10 years with a tenant break in year 5. One of the pre-conditions was that all sums due under the lease had to be paid up to and including the break date. The tenant served its break notice in accordance with the terms of the lease and made several attempts to contact the landlord to ascertain what (if any) payments would be due and owing at the break date. The tenant had no engagement from the landlord. On the break date the tenant vacated the property and returned the keys to the landlord. The landlord disputed that the tenant had terminated the lease effectively as there was £130 due by way of interest in respect of a previous late payment of rent and service charge. The court ruled that there was no implicit requirement for the landlord to serve a demand for the interest payment or inform the tenant that it was due. While the court did acknowledge that its judgement was an unforgiving one, it concluded that it was one it was obliged to reach.

    Further issues arise when there is an existing dispute in respect of service charge (which is not uncommon). This condition could be used by the landlord as a means to force the tenant to pay a disputed service charge in respect of which it has raised a valid objection. Otherwise the break would be invalid and the tenant could potentially remain locked into the lease it is seeking to break.

    Leases with turnover rents have added complications. When drafting a break clause in a turnover lease a landlord will often attempt to insert a pre-condition to the effect that the tenant is to provide an ad-hoc turnover certificate specifying the projected amount of turnover rent to be paid up to and including the break date. The break could be conditional until such a certificate has been provided/the projected turnover has been agreed and has been paid.

    Given the practicalities involved in preparing and certifying turnover certificates, such a pre-condition can cause real issues for tenants who are not aware that such a certificate is to be prepared, and the inclusion of this type of condition should be resisted.

    In any event, landlords should take comfort that a well drafted turnover schedule will include a clause that the tenant’s obligations in respect of producing a turnover certificate (in the usual way at the end of the accounting period) and paying turnover rent will continue beyond the end of the lease where the term has come to an end other than through the effluxion of time.

    If a landlord is insisting that such a pre-condition is included this should be highlighted to the tenant before completion of the lease and again when instructions are received to serve any break notice. 

    That there are no outstanding breaches of the tenant’s obligations

    This pre-condition gives landlords a wide scope to invalidate a break notice. Unfortunately the courts will apply a strict interpretation of this clause if a break is resisted and the smallest breach could result in a failed break (consider a tenant covenant to wash windows once per month…). We advise that when acting for a tenant all attempts are made to refuse the inclusion of this wording.

    If a landlord is insistent that this condition be included, the wording can be modified so that only substantial or material breaches of the tenant’s obligations will invalidate a break notice. For added comfort a caveat could be added that if, on receipt of a tenant break notice, there is a subsisting breach then the tenant must be afforded a reasonable opportunity to remedy same. But again, we would always advise this wording (even as amended) should not be included to avoid problems with activating a break.

    That the tenant give up the property with vacant possession

    The vacant possession condition can be quite subjective and is open to interpretation, which gives rise to uncertainty (something both parties should strive to avoid).

    By way of example, in the case of Riverside Park Ltd v NHS Property Services Limited the tenant’s break was conditional on the tenant delivering vacant possession of the property, which the tenant believed it had done. The court found however that the tenant’s works on the property (which it had carried out under a previous licence for alterations) meant that the tenant had failed to deliver up vacant possession in the strict sense, and the break was ruled invalid.

    As noted above, the preferred drafting is to return the property free from the tenant’s occupation and other lawful occupation. The reference to lawful attempts to address the presence of any unlawful trespassing occupiers which may well be beyond the control of the tenant and should not prejudice the tenant’s ability to break.  

    Are there any caveats that should be included when drafting break clauses?

    The following are useful clauses/caveats to also include in the break clause drafting:

    • Waiver of pre-conditions

     A clause permitting the landlord to waive any pre-condition at any time before the relevant break date by written notice to the tenant.

    • Repayment of sums paid in advance of break date

    When advising tenants, consideration should be given to the inclusion of a provision stating that the landlord will repay any rent or other sums paid in advance which relate to the period  after the break date. If this is not expressly stated in the lease then the tenant has no right to repayment of these sums.

    One final cautionary note comes from the case of Marks & Spencer Plc v. BNP Paribas where the Supreme Court ruled that in the absence of an explicit obligation in the lease for the landlord to refund any advance payment of rent to the tenant, then there would be no requirement for the landlord to do so, and the court certainly would not imply one.

    If you would like any further information or need advice on commercial development and leasing law, please contact:

    Gareth Planck, Partner in our Real Estate department - garethplanck@eversheds-sutherland.ie

    Hannah Boyd, Associate in our Real Estate department - hannahboyd@eversheds-sutherland.ie

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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