Break clauses: compliance with repairing and other obligations
Through a glass darkly
1 February 2011
Guy Fetherstonhaugh looks into the crystal ball for dilapidations surveyors
It has, for many years, been the norm for commercial leases to contain tenant’s break clauses. As far as the tenant is concerned, such clauses give useful flexibility, even if the rent payable may rise a little as a result. However, as far as the landlord is concerned, if (as is often the case) the clause is subject to a condition precedent to the effect that the tenant must have complied (either absolutely, or in some qualified way, so as ‘materially’, ‘substantially’ or ‘reasonably’) with its covenants in the lease, then experience shows that the tenant may well fail to comply with the condition.
Remember also, the covenant requiring compliance with statute: the plethora of recent primary and secondary legislation makes this area a minefield
The prudent tenant wishing to terminate its lease in accordance with a break clause of this type will instruct a building surveyor to advise it concerning compliance. The increasing numbers of cases in this area in the last few years bear testimony to the desperation of landlords to retain their tenants, and of their tenants to give up premises subject to an uneconomic rent and move elsewhere. If anything, the current downturn has increased this desperation, and it is likely that a number of these cases will come to court over the course of the coming year.
I see this, therefore, as a growth area for building surveyors on both sides of the divide. The landlord will be instructing its surveyor to find as much fault as possible. The tenant will be instructing its surveyor to find the same faults and specify their remedy. In this game of cat and mouse, the landlord generally has the upper hand. It is allowed to take into account not merely breaches that were reasonably capable of being discovered, but also breaches of which neither party had any inkling. The test, in other words, is whether the premises were in the covenanted condition (or qualifiedly so, according to any particular qualification that there might be) and not whether the defect could reasonably have been discovered in time.
Substantial or not?
In those, now admittedly rare, cases where an absolute breach is sufficient to disqualify the tenant from terminating its lease, we are unlikely to see much more litigation, because the facts will usually speak for themselves. In the case of qualified conditions precedents, however, there is much room for argument as to whether a breach is substantial or (to put it the other way round, as break clauses sometimes do) whether there has been substantial compliance. The crystal ball gazer’s work in this area has been aided by the comments of Chadwick LJ in Fitzroy House Epworth Street (No.1) Limited v The Financial Times [2006] 2 EGLR 13. Nevertheless, there remain many areas for argument.
For example, while compliance with the tenant’s repairing covenant calls for no particular comment, there are two notable areas of difficulty as far as other covenants are concerned. First, the covenant against alterations and its cousin, the covenant concerning delivery up of fixtures. It will be critical for the building surveyor to know in what state the premises must be returned. Typically, plans will be missing and the reinstatement obligation uncertain. Much research may be needed before the surveyor is able to formulate the remedial work proposals.
Remember also, the covenant requiring compliance with statute: the plethora of recent primary and secondary legislation makes this area a minefield, with topics ranging from Control of Asbestos to the Water Fitting Regulations. Building surveyors need to know when and in what circumstances these provisions apply.
My crystal ball therefore suggests that building surveyors should gird their loins, ready for action in this particular field. But so much for clairvoyance, let us sit back and see what actually happens.
Guy Fetherstonhaugh is a QC at Falcon Chambers