Break clauses are a common feature of commercial leases. They allow a tenant (and sometimes a landlord, or both) to break the lease before the end of the contractual term. The lease will specify a break date, how much notice must be given and the conditions to validly exercise the break.
Purpose
There are many reasons why either party might wish to exercise a break clause. For example, from a landlord’s perspective, they may want the option to end the lease early if their plan is to develop the property and they are waiting on the outcome of a planning application. From a tenant’s point of view, break clauses can act as a kind of insurance should they find themselves in financial difficulty and be unable to pay the rent mid-way through the term. Alternatively, if their business is doing well they may want the option to relocate to better premises or a nicer location.
Exercising the break
It is essential that the requirements in a break clause are followed to the letter. Whilst this article looks at the content and service of the notice, this also applies to the break conditions. Careful consideration should be made of the lease to ensure that any conditions precedent to the exercise of the break are complied with. For example, some break clauses require that the tenant must be up to date with payment of the rent and for there to be no subsisting breaches of any tenant covenants.
Content of the notice
As break clauses are contractual clauses, the terms of the lease must be examined to ascertain the required form and content of a break notice. In cases where the lease is silent on one aspect or other, general principles may be drawn from case law.
A minor error in a break notice is not necessarily fatal. It depends on whether the error affects the understanding of the ‘reasonable recipient’ of that notice. The question to be asked is:
“Is the notice clear to a reasonable tenant/landlord reading it and who has knowledge of the background facts?”
A recent example from case law illustrates this. Although the break date was incorrectly stated in the notice by one day, it was held that the notice was still valid.
However, this principle cannot be relied upon to override a contractual or statutory provision. If the clause states that the break notice must be on red paper, and it is served on blue paper, it will be invalid. Furthermore, if a relevant statute or the break clause itself explicitly states that a non-compliant notice will be invalid or ineffective, that will be the end of the matter.
Service of the notice
The requirements in relation to service of the notice must also be complied with. These will probably be stated within the lease, either within the break clause itself or in a general ‘notices’ clause.
In addition to specifying the form of service required, there may also be a requirement for the recipient party to acknowledge receipt for the notice to be valid. It has been held that if an acknowledgement is required, it must come before the break date has passed, regardless of when the notice was served. There could also be a requirement to serve a copy of the notice on a third party, such as a property manager.
If the lease is silent as to method of service, and no relevant statute applies, then the parties must rely on common law rules of service, i.e. the notice is served once it has been received by the recipient or their agent and there is sufficient causal link with the actions of the serving party. Electronic service has been held to be acceptable at common law.
The lease may also incorporate a statutory service regime, such as section 196 Law of Property Act 1925, which includes provisions for deemed service and thus reduces the likelihood of non-delivery issues arising.
The parties
It goes without saying but a break option can only be exercised by the parties who own the relevant legal estates. Therefore, the party serving the notice must correctly identify the party on whom they need to serve notice. If the titles are registered, the relevant parties’ identities can be ascertained by obtaining official copy entries from the Land Registry. These will not necessarily be the original parties as the lease may have been assigned.
An issue that causes concern is the ‘registration gap’, which refers to the period after one party’s interest in the lease has been assigned to another party but before the assignment has been registered at the Land Registry. This can create confusion as to which party the notice should be addressed to and served on. Where there is any ambiguity about who holds the legal interest, notices should be served on/on behalf of both the assignor and the assignee and the two notices should be expressed to be without prejudice of each other.
An agent can serve a break notice on behalf of their client, but the agent’s authority must be made expressly clear in the notice itself. Of course, the agent must have authority to serve the notice at the time the notice is served. Conversely, a notice can be validly served on an agent acting on behalf of the recipient, provided the agent is authorised to accept service on their behalf. It is advisable to avoid serving break notices on an agent unless there is express provision for this in the lease.
Practical tips
- Serve notice by more than one method to help to ensure the break notice reaches the recipient.
- Serve the notice by special or recorded delivery, where possible, so you have evidence that it was received by the recipient.
- If serving notice on a party occupying a multi-let building, serve the notice at the party’s specific premises – don’t just leave it the front desk/reception.
- If personal service is required, use a process server and ensure that you instruct them to ask the recipient to confirm their identity and counter-sign a copy of the notice.
- If there has been a recent assignment of the lease, serve notice on both the assignor and the assignee.
Commercial Property Team, rhw Solicitors LLP
