The legalities of breaking a property lease early

The fortunes of businesses vary and their building requirements change over time. Where premises are leased and a business wants to move mid-term to a location that is better suited, it will need to terminate its lease using the leaseholders break right, says legal expert Rebecca Watkins.

The requirements and obligations on tenants when exercising break rights are notorious for how they must be strictly complied with, and following recent case law it has become clear that no leeway will be given to a leaseholder in such circumstances.

It is important to remember to comply with all terms of a break clause that are held within the lease. As mentioned earlier, the terms of the break clause will be strictly interpreted. If a clause states that the break notice must be served on pink paper, then only that will do.

Next, leaseholders should check who has the right to terminate the lease. If the business is not the original tenant to the lease, then it should check that it actually has the right to terminate the lease. It may be that the right was only granted to a named tenant.

The break notice should be addressed to the right party and it is important that every party eligible to receive a copy of the notice, does so. If the landlord comprises two or more individuals or entities, the notice should be addressed to all parties and sent to the correct address. However, recent case law has confirmed that it may be sufficient to serve a break notice on the landlord’s agent. It is therefore worthwhile sending a copy of the notice to the landlord’s agent as well, in order to cover all eventualities.

While a leaseholder may be lucky to have a break clause that specifies the actual break date, many refer to an anniversary of a date relating to the lease, for example the term commencement date. If there is any possibility that the break clause could be interpreted in a different way to the business’s interpretation, then more than one notice may need to be served to ensure a successful termination of the lease.

Leases may come with pre-conditions before a break clause can be exercised. In other words, the tenant will have to comply with certain obligations before the lease can be terminated.

Leaseholders should check what is meant by ‘rent’, it may not only be the annual rent but other sums such as service charge, insurance, VAT, interest, or any other amount that might be considered as rent and due to the landlord under the terms of the lease. If in doubt, the landlord should be consulted in order to avoid receiving an invoice at the last moment, thereby making the break ineffective. Again, get the timing right. When should the payment be made? At the time of service of the notice or at the break date? If in doubt, do both.

Finally, in respect of payment of rent, if the break payment date falls between two rent payment dates, unless stated otherwise, the full rent instalment, including for the period falling after the break payment date, will be due. There must be no apportionment. It’s worth noting that there will be no obligation on the landlord to repay unless the lease contains an obligation on the landlord to refund any over payment for the period falling after the break payment date.

Again, it is important to ensure that not only has the business moved out of the premises but also that all fixtures, fittings and goods, together with any

sub-tenants and any workmen that may have

been carrying out remedial work, are no longer present. It is also advisable to hand back any keys prior to the break date.

This is an onerous condition that is thankfully becoming less common in break clauses following case law, as it can be difficult to comply with as the obligation can be interpreted subjectively. In simple terms, material compliance means that any obligation in a lease must be complied with, otherwise the served break notice may not be effective. Prior to the case, even the most trivial breach could leave this type of condition unworkable. Even so, leaseholders should do their best to comply with every term in a lease.

If a penalty payment, for whatever reason, is due the leaseholder should ensure that it is paid to the right party at the correct time. It should be noted that while it is sensible to seek the landlord’s acknowledgement and confirmation on such elements as outstanding sums and works required in order to materially comply with the terms of the lease, there is no obligation on a landlord to respond. Here the leaseholder must be proactive; if necessary it should check through records for any outstanding payments and any interest that may have accrued and all work that is believed to be necessary should be carried out.

Lastly, the leaseholder should ensure that it has served the notice correctly.

While this might sound obvious, it’s critical to make sure that the break notice is served not only in accordance with the terms of the break clause, but also via the method of service contained in the lease. If in doubt, the break notice should be served in various ways to ensure receipt. Some form of evidence of service should be obtained, whether this is an acknowledgement from the landlord (which cannot be guaranteed), or by using couriers and special delivery where delivery must be signed for.