The pitfalls of a break clause in a commercial lease

Introduction

A break clause allows a party to a lease to terminate the agreement before the end of the term. Tenants of all shapes and sizes are often woefully unaware of the legal pitfalls that exist in any attempt they may make to deploy a break clause. If you have a preconception of some fresh-faced band of entrepreneurs with crest-fallen faces at the realisation their break notice has failed and they are contract bound for years to come, think again. Those whose names stand as exemplars of failure include the likes of Marks & Spencer, the NHS and Siemens. Organisations which, one might imagine, employ experienced lawyers to keep them out of trouble.

Organisations such as Siemens are those with the financial resources to pursue an argument through the courts, as a result, we know about their problems. One can only wonder how many smaller firms there are for every Marks & Spencer, who simply swallow the disappointment of a failed break notice and hunker down for several more years in situ or become insolvent as a result of being unable to down-size.

The mechanics of giving notice

There are two legal mechanisms for giving notice under a lease: statutory and contractual. Statutory provisions under the Landlord and Tenant Acts (LTA) of 1925 (s196) and 1927 (s23) provide for the service of several types of notice as does LTA 1954 s27.

The provisions in a contract for giving notice are open to the design of the parties and the onus is on them to ensure that the words they write can be easily construed. Any conditions must be strictly carried out for the break notice to succeed. This can be difficult if a condition is either imprecise or should be interpreted in a way that the courts have previously adopted, but which might not seem obvious to the layperson.

Once exercised, a break notice cannot be unilaterally withdrawn. Mutual agreement between the parties is the only way withdrawal can take effect.

The pitfalls

A little detective work can uncover numerous examples of problems faced by tenants wishing to correctly deploy the break clause in their lease. This paper will don its Deerstalker and look primarily at three examples:

1. A case of imprecise wording
2. The case of the wasted rent
3. A case of unclear drafting

1: A Case of imprecise wording

Siemens Hearing Instruments Ltd v Friends Life Ltd [2014] 2 P&CR 5

This is a case that adequately demonstrates the problem of not following, to the letter, the instructions embedded in the relevant clause. In this case, the break clause stated:

“… notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954.”

In September 2012 the tenant’s solicitors wrote to the landlord giving notice that their client intended to terminate the lease as per the break clause. The key wording of the notice read thus:

“We, Manches LLP, Solicitors and Agents for the Tenant, … HEREBY GIVE YOU NOTICE, for and on behalf of the Tenant, that the Tenant intends to terminate the Lease 23 August 2013 in accordance with clause 19 of the Lease so that the Lease will determine on that date.”

On appeal, the court held that the break notice was invalid and therefore did not take effect.

The problem with this notice was that it did not expressly state that it was given under section 24(2) of the Landlord and Tenant Act 1954 (LTA 1954). In fact, it did not mention the Act at all. The reason, (Lewison LJ informs us in his decision) that the clause is so worded, is to exclude the possibility of the tenant requesting a new tenancy under s 26 of the LTA 1954, which might open up the possibility of negotiating a reduced rent.

2: A Case of Wasted Rent

Marks & Spencer PLC v BNP Paribas Securities Services Trust Co [2015] UKSC 72

This case concerns four leases between the parties, Marks & Spencer (M&S) being the tenant. Each lease was for a separate floor of an office building in central London and each was on the same terms as the others. Under the terms of these leases, basic rent was payable in advance on English Quarter Days. There were also additional payments made for car parking, insurance, and service charge.

The clause setting out the rent terms used the words “proportionately for any part of any year.” The leases also included a break clause which allowed M&S to terminate the lease on one of two dates, 24th January 2012 or 24th January 2016, on giving six months’ notice. The clause also stipulated that there should be no arrears of rent and that the tenant should pay a substantial premium by the break date.

M&S exercised its right to operate the break clause on the first of the two dates, giving adequate notice, paying the break premium in good time and ensuring rent and other payments were up to date. They then demanded repayment of the rent, (and other payments, but we will focus on the rent) made in advance for the period immediately after the break date (25th January) until the end of that quarter (24th March). The landlord refused to make any repayment so M&S started proceedings to recover the money.

The first instance judge, Judge Morgan, held that a reasonable person would consider that a term could be implied that advance rent paid for the broken period would be refunded following the break date largely because the break premium amounted to a year’s rent, and as such it should be taken that the parties had agreed that this would be compensation.

The landlords appealed to the Court of Appeal, where LJs Arden, Jackson and Fulford disagreed with Judge Morgan about this, in no small part due to a landmark 19th century case which still sets precedent for the principle that rent is not apportionable when paid in advance, namely Ellis v Rowbotham [1900] 1 QB 740.

The tenant appealed to the Supreme Court who, in short, agreed with the Court of Appeal, Lord Neuberger making short shrift to the implied term idea and consigning the case to the long list of those upholding the ancient principle.

3: A Case of Unclear Drafting

Goldman Sachs International v Procession House Trustee Ltd [2018] EWHC 1523 (Ch), [2018] L. & T.R. 28

Goldman Sachs International held a lease on an office building paying a passing rent of £4 million per annum. The lease contained a break clause which stated that:

“23.1 Subject to the tenant being able to yield up the premises with vacant possession as provided in clause 23.2, this lease shall be terminable by the tenant at the expiry of the twentieth year of the term by the tenant giving to the landlord not less than 12 months’ and one day’s previous notice in writing.”

“23.2 On the expiration of such notice, the term shall cease and determine (and the tenant shall yield up the premises in accordance with clause 11 and with full vacant possession) …”

Clause 11 provided that the tenant would remove any alterations and reinstate to no lesser condition than that set out in a “Works Specification”.

Goldman Sachs wished to break the lease, and in advance of doing so cunningly brought a Civil Procedure Rules (CPR) Part 8 claim to obtain a declaration from the court so it would know in advance exactly what was expected of them as tenant to correctly deploy the break clause.

The area of contention was around the issue of Clause 11. The landlord contended that the tenant had to give both vacant possession and compliance with Clause 11. The tenant maintained that although they were bound by Clause 11 and the obligations to reinstate the property, it was not a precondition to correctly implementing the break clause.

The court agreed with the tenant’s interpretation that the break clause contained a single condition. On the ordinary meaning of the words in clause 23.1, the tenant was to yield up the property with vacant possession as set out in 23.2. The two-condition argument, to yield up the property with vacant possession and also to yield up in accordance with Clause 11 was not correct.

The interesting aspect of this case is the tenant’s use of a Part 8 claim. By using the Part 8 process, the tenant gained what is in effect a ruling in advance. This ruling set out how the clauses were to be interpreted and thus what the tenant must do to ensure a successful deployment of the break clause. This is an idea other tenants might consider when faced with uncertainty, before making an expensive mistake. The remaining term for Goldman Sachs represented several years at a rent of £4 million per annum. Given that fact, it would not have meant a resigned shrug and a shuffle back to the office for tea and biscuits if the break had failed.

Other examples – a whistle-stop tour

Other examples which demonstrate the level to which strict interpretation can apply but for which there is no room to expand on here include:

1. The case of the wrong address: In Capital Land Holdings Ltd v Secretary of State for the Environment [1996] SCLR 75, the lease stated that notices to the landlord must be sent to its registered office. The tenant’s break notice was sent to the landlord’s place of business. It was not in dispute that the landlord had received the notice. The court held that the provisions were mandatory, that service was ineffective and that no break could be made.

2. A case of no interest: In Avocet Industrial Estates LLP v Merol Ltd and another [2011] EWHC 3422 (Ch), the break clause stated that the tenant had to make all payments due by the break date. The High Court held that the tenant’s failure to pay default interest (even though the landlord has not issued any demand for it) meant that the break was invalid. The interest in question was around £130.

3. The case of premature paint: In Bairstow Eves (Securities) Ltd v Ripley [1992] 2 EGLR 47, the lease stated that the property was to be painted in the final year. The tenant had it painted just before the beginning of the final year. The practical result at the end of the tenancy was the same as if it had been painted a few weeks later. The court held that the lack of compliance invalidated the break.

4. The case of chattel or fixture: In Riverside Park Ltd v NHS Property Services Ltd [2016] EWHC 1313 (Ch), the tenant had installed partitioning during their tenancy. When the tenant vacated the property, they left the partitions in situ. The High Court held that the partitions were chattels that interfered with the right of possession. Vacant possession had not been given. Break invalid.

5. The case of the registration gap: In Sackville UK Property Select II (GP) No.1 Ltd v Robertson Taylor Insurance Brokers Ltd [2018] EWHC 122 (Ch), the assignee of the lease attempted to serve a break notice before registering the lease assignment at the Land Registry. The notice was held to be ineffective due to a lack of standing to serve the break notice under the terms of the lease.

6. The case of return to sender: In Blunden v Frogmore Investments [2002] EWCA Civ 573, the court held that the landlord had validly served notice by sending it via recorded delivery, despite the fact that the notice was later returned to sender in the post.

Conclusion
These cautionary tales suggest that any tenant, large or small, is well advised to seek advice before attempting to deploy a break clause, even when it appears simply worded. I leave you with the words of Lord Justice Lewison from the Siemens case:

“The clear moral is: if you want to avoid expensive litigation, and the possible loss of a valuable right to break, you must pay close attention to all the requirements of the clause, including the formal requirements, and follow them precisely.”

Landlord and tenant law is a specialist area; this note is but a brief overview of break clauses. As one might expect I have not covered all aspects, notably those where a landlord gives notice, and have made some generalisations. If you require advice or assistance with any property matter, do not hesitate to contact clerks@becket-chambers.co.uk.