Resolving a break clause dispute: a guide for landlords

In times of economic uncertainty and market upheaval it is not unusual for business tenants to take stock of their position. This includes assessing their present lease terms and considering whether the exercise of a break clause might be a good idea, for example where their need for space has changed or where they believe there are better deals to be done elsewhere.

From a landlord’s perspective, any move to bring a lease to an end early will rarely be a welcome development, and it is therefore common practice for break clause provisions to be heavily scrutinised.  The right to break is likely to be robustly challenged in any case where there has not been absolute compliance with break clause conditions.

While this is an understandable response, which in some cases may be entirely appropriate, it is not always the best approach and is one that can lead to a dispute arising which may be costly and time consuming to resolve.

With that in mind, here are the top three things to consider before deciding how to proceed with advice from Divyesh Popat, a partner in our property litigation team on how you can try to work with your tenant to reduce tensions and reach an acceptable compromise.

What does the break clause say?

To determine whether the conditions have been met for a tenant to validly exercise a break, you need to examine the terms of the break clause carefully to see what it requires. This may sound straightforward, but it can be quite a complex task as the answer will depend on the wording used and how the clause should be read when viewed alongside other lease provisions.

This can be seen in the recent case of Capitol Park Leeds plc v Global Radio Services Ltd (2021), which concerned an apparently simple break clause condition that required the tenant to give vacant possession of the premises on the relevant break date.

The tenant maintained that they had done this by ensuring that they and their belongings were out of the premises by the date on which the break was to take effect. However, this was disputed by the landlord who argued that:

  • as ‘the premises’ was defined in the lease as including the original building and all fixtures and fittings whenever fixed; and
  • as the tenant had stripped out the premises to such an extent that, not only were they left in a terrible condition, elements of the original building and historical fixtures and fittings had also been removed; and so
  • the condition had not been complied with and therefore the break had not been validly exercised.

While the landlord succeeded in their arguments before the High Court, they lost their case on appeal.  It was held that, when viewed in context, it was clear the break clause here was not concerned with ensuring the premises were left in a particular physical state, but rather that they were handed back free of people, personal possessions and other tenant interests.

Is challenging the break really worth it?

If you have a hard-to-let property, and the existing tenant has always been good at paying their rent on time and complying with their lease covenants, then launching a challenge to the exercise of a break clause (where clear grounds for doing so exist) may absolutely be the right thing to do. However, where the tenant is not that great and demand for your property is likely to be high, then it might be better for you to ignore non-compliance and to focus your attention on getting your property back in as good a condition as possible.

Remember that where the tenant is guilty of a breach of covenant, you will still usually have the right to claim damages in respect of this. By letting issues of non-compliance go, it does not necessarily follow that you will be left out of pocket.

For example, in the Global Radio case, although the break was found to have been validly exercised because the tenant had left the premises in such a dire state, it was still open to the landlord to sue them for compensation for failing to comply with the yield-up provisions which required the premises to be left in an acceptable state of repair, condition and decoration.

Why does the tenant want to leave?

While it is settled law that once a break clause notice has been served it cannot be withdrawn, that does not mean there is no scope for the tenant to change their mind and decide that they want to stay. For this reason it is always worth talking to the tenant about their reasons for wanting to leave and to consider whether there is anything reasonable that you can do to address their concerns, whether that might be reducing their rent, reconfiguring their space or even offering them alternative accommodation better suited to their needs.

One word of caution though. As the service of a break clause notice terminates the existing lease, it is vital that you appoint a solicitor to support you through the negotiation process.  This will ensure that the terms of any deal you strike are properly documented in a new lease which, where appropriate, continues to be contracted out of the 1954 Act security of tenure provisions.

Need our help?

If you need advice and support in responding to the service of a tenant’s break clause notice, then why not give Divyesh a call on 020 7845 7400 to see how we can help.

Our property litigation team has extensive experience in resolving break clause disputes on commercially and economically sensible terms, including those concerning:

  • the timing of a notice and whether it complies with lease requirements;
  • the right to claim a rent rebate where a break takes effect between quarter days;
  • the seriousness of a breach of covenant, where the right to effect a break is dependent on no material breaches having occurred; and
  • whether a tenant is required to give vacant possession or merely vacant occupation, with the latter requirement being less onerous and therefore easier to satisfy.

We can also provide guidance on the steps you can take to dissuade a tenant from triggering a break. This can include offering them the chance to regear their lease to make it more acceptable if they agree to remain in place for the remainder of the term, or suggesting a deed of variation which pushes the break date back by six to twelve months so they have more time to take stock.  This may be particularly attractive to tenants who are thinking about vacating due to Covid-induced pressures which may ease within the coming year.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.