Exercising a tenant's break option - the pitfalls
With many tenants experiencing difficult trading conditions, they may be looking at ways of exiting their Lease. At the same time, landlords will be anxious to ensure that they do not have any voids.
With demand for commercial property severely affected by the economic downturn and a landlord unlikely to accept a surrender, the existence of a break clause may be a tenant's only option. Break options are often subject to the tenant complying with certain conditions which must be strictly fulfilled. Failure to fully comply will mean that the break will fail and the Lease will continue for the remainder of the term, or until the next break date. The following issues should be considered:
Compliance with covenants
It will be necessary to check very carefully the tenant's covenants in the Lease. It may also be necessary to examine any superior lease and any documents supplemental to the Lease such as deeds of variation, licences for alterations and schedules of condition.
Service of notice
A break option will usually be triggered by a written notice. The time limits for service will be set out in the Lease and failure to serve a notice on time will almost certainly invalidate the break. It is particularly important that the notice is served on the correct party. If the landlord's title is registered, up to date details should be obtained from the Land Registry.
The exercise of a break option may be conditional on the payment of money to the landlord. If the payment is not made by the date specified in the Lease, the break may not be valid.
Obligations for repair and reinstatement
These obligations have the potential to lead to a dispute when a tenant seeks to exercise a break option which is conditional on compliance with the tenant's covenants. It is essential to instruct a surveyor to prepare a schedule of works well in advance