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What is a break clause?
Break clauses are contractual provisions in a lease that allow either the landlord or tenant to bring the contractual term of the lease to an end early.
On the face of it, a break notice appears to be a straightforward document, and it often looks easy to exercise. However, failure to exercise a break correctly can have significant consequences.
Break provision
The lease usually states that one party has to give the other party written notice prior to the break date. Whilst there can be a rolling break provision, more often, the break date is on a fixed date, and failure to exercise the break provision properly will result in the lease continuing for the remainder of the term. This could be a further 5 or 10 years of rental payments, which may be a significant sum of money. It is, therefore, not surprising that these matters often end up in Court, particularly in a market where rents are going down, and tenants want to exit the property because they are paying over the odds in rent.
Exercising a break clause
There are a number of pitfalls that any party looking to exercise a break should be aware of. These include:
- A break clause can only be exercised by the legal owner of the property. A beneficial owner cannot exercise a break clause but can ask the legal owner to do so on their behalf. This is important if the interest in the property has recently been transferred but not registered at HM Land Registry. This was seen in the case of Sackville UK Property Select II (GP) No.1 Ltd v Robertson Taylor Insurance Brokers Ltd [2018], where an assignee served a break notice but was not the registered proprietor and could not demonstrate the notice had been served as agent for the original tenant who was still the registered owner.
- Once a break notice has been served, it cannot be unilaterally withdrawn.
- The provisions of the lease must be strictly adhered to in order to ensure the break notice is valid. In the case of Siemens Hearing Instruments Ltd v Friends Life Ltd [2014], the break clause states that “…notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954”. The break notices did not use these words and instead said, “We…HEREBY GIVE YOU NOTICE…that the Tenant intends to terminate the Lease on 23 August 2013 in accordance with clause 19 of the Lease so that the Lease will determine on that date.” The break notice was held by the Court to be invalid.
- Making sure that the notice is served in accordance with the terms of the lease. In Capital Land Holdings Ltd v Secretary of State for the Environment [1996], the notice was sent to the landlord’s place of business, but the lease said the notices to the landlord must be sent to the registered office address. The Court held that the notice provisions in the lease were mandatory rather than permissive, so the break notice was ineffective as it had been incorrectly served.
- Ensuring the break conditions are complied with. In Avocet Industrial Estates LLP v Merol Ltd and another [2011], it was a condition of the break that the tenant made all payments due by the break date. The tenant failed to pay a small amount (around £130) of default interest, and despite the fact that the landlord had not demanded this, the break was held to be invalid.
Failing to exercise a break correctly
In Bairstow Eves (Securities) Ltd v Ripley [1992], the lease states that the property was to be painted in the final year. The tenant painted it just before the start of the final year. This lack of compliance meant the break was invalid.
There are many more examples where break notices have not been exercised correctly. Whilst exercising a break may appear to be straightforward, given the risk involved in failing to exercise a break correctly, landlords and tenants are well advised to seek advice before serving a break notice.