Break clauses

A break clause, although not a remedy per se, is an important item to consider early on: whether there is one, what its terms are, and how and when it might be operated.

Some leases allow their term to be reduced, either by the landlord or tenant, by way of the service of a ‘break notice’. In some instances a break notice will only be valid if certain conditions are met, either at the time that the notice is submitted or when the notice period has elapsed and the break is about to take effect. These conditions, termed ‘conditions precedent’, can take the form of specific items (such as the payment of a premium, or that all rent and service charge payments should be discharged), or they can be more general, usually requiring compliance with all of the tenant’s covenants.

In general, it is the obligations to repair, decorate and not to make alterations that cause the greatest difficulty in complying with these conditions precedent since, in order to secure the break, a tenant cannot rely on a negotiated settlement. Even if negotiations appear to be progressing well, the tenant must always be in a position to physically complete any necessary works to comply with the lease obligations prior to the termination date. However, the whole of the lease should be checked to ensure that the notice has been correctly served and the remaining conditions complied with. The importance of the precise wording of the break notice was emphasised in Siemens Hearing Instruments Ltd v Friends Life Ltd [2014] EWHC Civ 382, [2014] PLSCS 114.

To obtain the benefit of the break, the tenant (it is usually the tenant affected in this way) must make sure that the conditions are strictly complied with in order for the notice to be effective. The importance of this was emphasised in Grainger Trust plc v Micros-Fidelio UK Ltd [2003] EWHC 688 (Ch), where the tenant’s failure to meet its repairing obligations meant that its attempt to operate a break clause was ineffective. An example of even small amounts of disrepair rendering a break clause ineffective was Bairstow Eves (Securities) Ltd v Ripley [1993] 65 P&CR 220) where the tenant had failed to paint in the last year of the term. In cases where a surveyor is advising a landlord the RICS Dilapidations guidance note (11.2.2-11.2.3) recommends that the surveyor should consider whether a schedule of dilapidations should be sent to the tenant before the break date – but only if specifically instructed following their client receiving legal advice. This might be helpful in setting out to the tenant what works are required in order to effect the break. If the landlord is seeking financial compensation in lieu of works, it is likely that such a schedule should be fully costed, including any consequential losses. There is, however, no obligation on the part of the landlord to assist the tenant in securing a break.

Importantly, while an analysis of the standard of repair should still take account of the nature of the area, the type of building and so on, it is not necessary for there to be actual damage to the landlord for the break notice to be defeated. As such, it is not possible to use tenant defences such as diminution in value.

The precise wording of the break clause is crucial, since, depending in part on the context, there are important differences between ‘reasonable’, ‘substantial’, ‘material’ and ‘absolute’ compliance.

Where absolute compliance is a condition of the right to determine, even where a small, insignificant breach exists, that would probably be sufficient to frustrate the operation of the break. As the cost of rental payments for the remainder of the lease will frequently far exceed the cost of the dilapidations claim, a process of risk analysis is often required to ensure that the appropriate outcome is achieved. It is worth considering carrying out work to a standard considerably higher than that required by the lease in order to ensure that the break is operative.

Following Fitzroy House Epworth Street (No. 1) Ltd and Anor v The Financial Times Ltd [2006] EWCA 329 the qualifying words ‘material’ and ‘substantial’ may be interchangeable, again depending on context. In Fitzroy (in which material compliance was required) the break clause was effective as the landlord’s ability to relet the property had not been impeded by the outstanding breaches. See also Ibrend Estates BV v NYK Logistics (UK) Limited (2011) where repairs were not required to be carried out, but vacant possession had to be given; the tenant failed to give vacant possession because it was carrying out repairs after the break date. More recently, in the case of Riverside Park Ltd v NHS Property Services Ltd [2016] EWHC 1313 a tenant's failure to remove a large amount of demountable partitioning was found to thwart a break requirement to deliver up vacant possession on the basis that the partitions were held to be chattels capable of being removed without damaging themselves or the fabric of the building.

In some instances, the tenant must ‘reasonably’ comply with its lease covenants for the notice to be valid. This gives the tenant a small amount of leeway in its performance of the covenants, especially if it has attempted to carry out the repairs, but has failed to do them all perfectly (see Gardiner v Blaxhill [1960] 1 WLR 752 and Bassett v Whiteley [1982] 45 P&CR 87).

Given the serious ramifications of failing to secure a break, it is considered that (regardless of the extent of any feeling of relaxation that any particular form of words may impart), the tenant may have to aim for full compliance.

In practical terms it is difficult to achieve compliance with conditions precedent to a satisfactory level. Problems often arise as a result of a lack of information about the existence, nature and extent of past alterations, the need to attend to every minor disrepair and the differing professional opinions of surveyors. To some extent these problems can be mitigated by giving early attention to the issues, erring on the side of caution in defining the repairs and getting experts to view the premises on the break date. It is also helpful to seek dialogue with the landlord as early as possible to find out what it expects. While the landlord will be under no obligation to assist in this respect, the courts might be expected to be more supportive of a tenant if there are small discrepancies and the landlord refused to co-operate.

Because of these difficulties most conditions precedent are negotiated away by an early dilapidations settlement with the landlord. The tenant, however, needs to remain mindful that if negotiations become protracted and it fails to reach a satisfactory conclusion, it may have insufficient time to carry out the work and the lease will continue. This is particularly true as the landlord is under no obligation to accept a negotiated settlement and can thus force the tenant either to attempt to comply with its obligations or to continue the lease.

Break clauses, particularly those requiring absolute compliance with the terms of the lease, are notoriously problematic and may carry a large element of risk. It is professionally onerous work and surveyors should think carefully before agreeing to take on a break clause instruction. Any surveyor acting in a break clause case should refer to the client’s solicitor and a break notice must always be served by a solicitor, not a surveyor.