Give Me a Break! Pitfalls to Avoid When Drafting and Exercising Break Rights

October 10, 2016

Bringing a lease to an early end is not without its problems. There are countless examples of break clauses which have been disputed in court and the resulting decisions can often be unexpected. Over the last year, there has been a hat-trick of cases which have delivered more surprises and continue to highlight the need to approach break clauses with considerable care and caution. Although each of the cases relate to a different part of a break clause, when considered together, they help to devise a useful list of practical pointers which should be remembered when drafting and exercising break clauses.

Advance rent refunds? A reminder that tenant satisfaction is not guaranteed

Break clauses are often heavily negotiated – they are carefully considered by landlords and tenants as well as their professional advisers. Indeed, this is one of the reasons why courts are hesitant to intervene and imply additional terms into such clauses.

In Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, the break clause in question did not contain a provision which entitled the tenant to claim a refund for rent paid in advance of the break date, but which applied to the period after the break date. The court decided that if the parties had intended to apportion advance rent paid in this way, then they would have expressly provided for it. Therefore, the landlord was entitled to retain the rent for the full quarter.

The judgment may have come as a surprise to many; however the lease was of considerable length and had been properly negotiated between the parties. The lack of a rent refund mechanism did not prevent the break clause from working commercially in a coherent manner, so the court steered clear of implying a term.

Aside from serving as an important lesson on appointing advance rent, the decision also highlights the importance of setting out each and every component of a break clause in a full and comprehensive manner. Never rely on the assumption that something, no matter how obvious it may seem to a bystander, will be implied by the court if litigated.

Limited partnerships – landlords which lack personality

In contrast to the Supreme Court decision in Marks & Spencer, the High Court inVanquish Properties (UK) Limited Partnership v Brook Street (UK) Limited [2016] EWHC 1508 (Ch) thought it proper to intervene and deemed service of a landlord break notice to be invalid. This case related to the service of a break notice on behalf of a landlord with the landlord being named, both in the lease and in the break notice, as a limited partnership.

As a matter of partnership law, the court held that the landlord entity could not be a limited partnership because a limited partnership does not have a legal personality and cannot hold a legal interest in property. The correct landlord was in fact the general partner of the limited partnership which was a limited company and thus capable of holding a lease. The court intervened here because there was nothing on the facts to make it clear that reference to the limited partnership in the break notice should have been to the general partner. Without the court’s intervention, the parties would have been left in doubt as to what was actually intended.

Though the circumstances here are rather bespoke, limited partnerships now often feature in property-holding structures. As such, it is more important than ever to appreciate that limited partnerships cannot hold a legal estate in land. More generally however, the case illustrates that care should be taken when serving a break notice, particularly regarding on whom the notice should be served and whether it is necessary to serve the notice on more than one entity. The wording of the lease should be carefully considered and if there is any element of doubt, then legal advice should be sought in good time.

Partitions may act as a barrier to a lease break

Break clauses are often subject to conditions which must be fulfilled in order to bring a lease to an end. Conditions take various forms and most commonly relate to the payment of outstanding sums of money and the state and condition of the property when it is handed back to the landlord.

In Riverside Park Ltd v NHS Property Services Ltd [2016] EWHC 1313 (Ch), the tenant’s break was conditional on giving vacant possession. However, having exercised the break, the tenant left several items at the property, including partitioning and kitchen units. In the decision, the court made a distinction between chattels (i.e. personal items which are treated as separate to the property) and fixtures (i.e. items which become part of the property to which they are attached). Focusing primarily on the partitioning, the court considered these to be chattels – the partitions were demountable and only “ slightly attached” to the property and their configuration was unique to the tenant. The chattels substantially interfered with the landlord’s enjoyment of the property and therefore vacant possession was not given. The break was frustrated.

Attention should always be paid to break conditions, particularly during the drafting stage. A well advised tenant will seek to limit the scope of break conditions to ensure that the conditions can be satisfied. A vacant possession condition should be avoided if possible; a more acceptable condition would refer to the property being delivered to the landlord free from any third-party occupiers.

Give yourself a well-earned break!

Arguably, in the post-Brexit era, break clauses will be more important than ever; uncertainty in the market may lead to landlords and tenants trying to argue that breaks are rendered ineffective to ensure that leases run their full term. Even if this is not the case, the recent case law continues to act as a reminder that “break-ups” can be complicated. In order to avoid the common pitfalls, remember to take the following precautions:

  • Draft break conditions in a clear and concise manner. Ensure that there are sufficient safeguards in place so that onerous conditions can still be satisfied by the relevant party.
  • Include as standard an advanced rent refund mechanism to be employed once a break right has been exercised. Consider whether it is appropriate for break dates to mirror rent payment dates.
  • Diarise break dates and notice periods. Utilise calendar reminders so that you and your legal team have sufficient time to prepare break notices and serve them in accordance with lease terms.
  • Ensure that break notices are served by the correct entity, on the correct entity, at the correct address and using the correct method of service as per the lease terms.
  • Familiarise yourself with any conditions which must be satisfied on, or in advance of exercising the break right. Make sure that the conditions are followed to the letter.
  • Open a dialogue with the other party to clarify what each party expects, particularly on account of fixtures and fittings and amounts due.