The pitfalls of commercial lease break clauses

What is a break clause?

A commercial lease break clause allows a party to terminate the agreement before the end of the contractual term. While that sounds straightforward, many commercial tenants are unaware that exercising a business break clause can prove a legal minefield. There are countless examples of tenants with failed break notices stuck in unsuitable or unaffordable premises waiting to see what comes first – insolvency or the end of the lease.

Exercising a business break clause

There are two mechanisms for exercising a business break notice:

• Statutory notice. Section 196 of the Law of Property Act 1925, section 23 of the Landlord and Tenant Act (LTA) 1925, and section 27 of the LTA 1954 provide for the service of a break notice in various situations.
• Contractual notice. The wording of the break clause is entirely a matter for the parties, who should ensure the form of words is easily construed. Any conditions specified in the clause must be strictly complied with for the break notice to succeed. This will be difficult if the wording is imprecise or if the courts have previously interpreted the form of words used differently than intended by one or both parties.

It’s important to remember that a party cannot unilaterally withdraw a break notice.

Break clause wording

A classic example of a case demonstrating imprecise wording in a business break clause was Siemens Hearing Instruments Ltd v Friends Life Ltd [2014]. Here, the break clause stated “…notice must be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954.”

However, when the tenant’s solicitors gave notice, it read, “We [solicitors] hereby give you notice, for and on behalf of the Tenant, that the Tenant intends to terminate the Lease on [date] in accordance with clause 19 of the Lease so that the Lease will determine on that date.”

On appeal, it was held that the break notice was invalid as it was not expressly stated to be given under section 24(2) of the LTA 1954.

Other examples

Another interesting case was Bairstow Eves (Securities) Ltd v Ripley [1992]. Here, the lease stated that the tenant must paint the property during the final year of the lease. Instead, the tenant had the property painted a few weeks before the beginning of the final year. The result was the same in all practical respects. However, the court held that the tenant had failed to comply with the lease, invalidating the break.

In the case of Capital Land Holdings Ltd v Secretary of State for the Environment [1996], the lease stated that all notices to the landlord must be sent to its registered office. Instead, the tenant sent their break notice to the landlord’s place of business. There was no disputing that the landlord received the notice. But the court held that the lease provision was mandatory and that service was therefore ineffective. Therefore, no break was possible.

In Riverside Park Ltd v NHS Property Services Ltd [2016], the tenant had installed partitioning in the property during their tenancy. However, when the tenant vacated, they left the partitions in situ. The judge held that the partitions were chattels interfering with the landlord’s right of possession. Accordingly, the tenant had not given vacant possession and the break was invalid.

These cases highlight the importance of taking advice when drafting a lease and before attempting to exercise a business break clause.