Legal Briefing

Property litigation: breaking up is hard to do

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Dispute resolution | 01 June 2010

In the current market, tenants increasingly seek to exercise break clauses of over-rented and unwanted properties, but in so doing have encountered resistance from landlords. Three recent High Court and Court of Appeal decisions underline the difficulties a tenant faces in attempting to effect a break clause in a commercial lease. This article will examine these cases and summarise some of the lessons learnt from case law, particularly in respect of service of the break notice and compliance with conditions.

What is a break clause?

A break clause is the expression used to describe a right to terminate a lease, typically on a given date (the break date), by written notice. It commonly provides for six months’ notice to be given. If such a notice is ineffective, the lease carries on beyond the break date, often to the contractual expiry of the lease.

Break clauses frequently specify conditions that must be satisfied for the break to take effect. Common examples include the tenant being obliged to pay all rent owing (and/or all other payments owing); to perform all of its covenants; to not be in breach of its repairing and/or redecoration covenants; and to give up vacant possession by the break date. Break clauses in a landlord’s favour are less common and sometimes require the landlord to establish an intention to redevelop.

It is generally held that where there are conditions attached to the operation of a break clause, they must be strictly performed within any specified time limits.

Case law indicates that tenants not only have difficulty complying with what can be onerous conditions, but also that break notices frequently fail by virtue of tenants serving the notice on the wrong party or not in the manner prescribed by the lease.

Norwich Union Life and Pensions v Linpac Mouldings Ltd & ors [2010]

In Norwich Union, break clauses were contained in licences to assign granted to a company called Linpac Mouldings Ltd (Linpac), entitling ‘the Assignee (meaning Linpac Mouldings Limited only)’ to terminate the term by notice. Linpac assigned the leases to Ecomould Ltd, who subsequently went into administration. Consent was sought from the landlord to re-assign the leases back to Linpac. The landlord refused consent on the basis that there was a risk that Linpac would then seek to exercise the personal break right.

In the High Court, Lewison J held that the landlord’s consent had been reasonably withheld, even though its fear that the break clause would ‘revive’ on the assignment was unfounded. The question was not whether the landlord’s appreciation of the legal position was right or wrong, but whether it was a reasonable view to hold.

Lewison J then held that the rights to break perished on the assignment to Ecomould and would not revive on an assignment to Linpac. The proposition that the lease could be terminated by someone who once was, but no longer is, the tenant in possession ‘makes no commercial sense at all’.

The Court of Appeal agreed. Etherton LJ said that he had ‘no hesitation’ in rejecting Linpac’s appeal. He said that the leasehold documents should, in the usual way, be interpreted so as to:

‘Give effect to the intention of the parties to be ascertained in the light of the commercial purpose and context of those documents and the factual setting known to the parties.’

A provision allowing a former tenant to bring a lease to an end at a time when the lease is not vested in them ‘would be extraordinary, even if technically possible’. If the parties had intended this, they would need to take particular care to make it unambiguously clear.

Linpac should have sublet the leases, rather than assigned them, thus preserving its right to break.

Orchard (Developments) Holdings plc v Reuters Ltd [2009]

In Orchard, the break clause provided that the tenant was entitled to terminate the lease at the end of the fifth or tenth year of the term by giving six months’ previous written notice to the landlord. The notice provision in the lease provided that a notice was valid if:

  • it was given by hand, sent by registered post or by recorded delivery and served on the landlord at its registered office; or
  • the notice was served in some other way, as long as receipt was acknowledged by the receiving party or its authorised agent.

The notices delivered by hand by a process server were put in the wrong letterbox. Further notices were sent by fax to the landlord’s office, but after the six-month period. Subsequently, the landlord’s solicitors wrote a letter to the tenant’s solicitors acknowledging the fact that the faxed notices had been received at the landlord’s office.

The High Court held that the landlord had retrospectively validated the informal notices sent by fax. The Court of Appeal disagreed, allowing the landlord’s appeal. Rix LJ held that, where the timing of the notice is part and parcel of its essence, it would be ‘odd’ if a notice that only became effective too late could nonetheless be an effective notice. If it is ineffective at the critical moment six months before the lease anniversary in question, it cannot be made effective within the six-month notice period.

Orchard highlights the view commonly held and expressed by Rix LJ that:

‘The provisions regarding a break clause option are there for the tenant to operate, and he fails to operate them correctly and timeously at his peril.’

Prudential Assurance Company Ltd v Exel UK Ltd & anor [2009]

Finally, a dispute concerning a break clause that did not reach the Court of Appeal. Prudential was decided by the High Court last year and is a salutary lesson to solicitors acting on behalf of tenants seeking to exercise a break notice.

The premises in question were let to two group companies, one trading and one dormant. The notice served stated that it was being served for, and as agents of, the trading company only. No reference was made to the other tenant, the dormant company.

The High Court held that the break notice was invalid. A mistake in a notice will not necessarily invalidate it if its meaning is still clear but, in Prudential, the notice could not ‘unambiguously have been understood to be an effective notice by a reasonable recipient’.

Lessons learnt

These cases and many others that precede them highlight the various difficulties faced by tenants in exercising break clauses. Lessons can, however, be taken from them:

Serving the notice

  • Consider all of the terms of the lease carefully.
  • Check the identity of the current tenant and current landlord (who is paying the rent and to whom, the title and the Land Registry).
  • Confirm that the notice can be served by the current tenant (and was not personal to a previous tenant).
  • Check and follow the service provisions in the lease, particularly where they are mandatory.
  • It is normally worth serving on the current registered office if the receiving party is a company (check the details with Companies House).
  • Ensure that service is expressed to be served on behalf of, and as agents for, the correct party.
  • In serving the notice, it is often advisable to adopt the wording of the break clause.
  • Service must obviously be in good time in accordance with the provisions of the break clause.
  • When the notice is sent ensure that it is signed for (if sent by recorded delivery) or, if applicable, hand delivered in good time.

Note the lesson learnt from Claire’s Accessories v Kensington High Street [2001] where the notice was served (by the landlord) in good time at the tenant’s property, but not, as provided by the lease, at the tenant’s registered office. The court held that the requirement was mandatory and the notice was held to be invalid.

Complying with conditions

  • Check exactly what conditions must be complied with for the break to operate.
  • Consider from when compliance is required – some clauses provide that compliance is required from when the notice is served up to the time that the break takes effect.
  • If the lease requires all rents to be paid, consider what sums are reserved as rent, such as service charge and insurance. Ensure that all sums are paid on time.
  • If the break clause requires vacant possession, make sure the landlord is able to occupy the property without any physical or legal impediment.
  • The obligation to yield up the premises in good repair can be a difficult condition to comply with. If compliance is to be ‘material’ this will assist, but it is still difficult. The test laid down by the Court of Appeal in Fitzroy House Epworth St (No 1) Ltd & anor v The Financial Times Ltd [2006] is that materiality must be assessed by reference to the ability of the landlord to re-let or sell the property without delay or additional expense.
  • Be careful of conditions that must be complied with no matter how trivial the breach. For example in Bairstow Eves (Security) Ltd v Ripley [1992] EGLR 47 the lease required that the property be painted in the last year. It had in fact been painted just before the beginning of the last year but the court held that the condition as to compliance had not been satisfied and the break was ineffective.
  • If at all possible, as a tenant, you are well advised to try and get the landlord ‘on board’. Ask the landlord to confirm what steps you need to take to comply with the conditions. If the landlord responds (it is not required to do so) then this can, in certain circumstances, give the tenant reassurance as to the steps it needs to take.
  • If the break date falls partway through a rent period and payment of rent in advance is a condition, should the tenant pay the entire quarter? Unless the break clause says otherwise, the safe option is to pay the entire quarter owing and then seek to reclaim the balance after the break has taken effect. However, the bad news for tenants is they are not necessarily entitled to be reimbursed.

Conclusion

The overall message in this market is clear: tenants must tread extremely carefully to ensure that their break notices are effective. If they fail, the consequence of having to pay rent on an unwanted property for several years can be very costly.