Break Options – apply “business common sense”

In the current economic climate, landlords and tenants are increasingly eager to protect their position when it comes to tenant’s break options.  Landlords are identifying ways of invalidating notices with tenants keen to ensure that notices are served correctly.  Two recent cases have highlighted the lengths parties are willing to go to and the importance of understanding the terms of your lease.

The first case highlights the importance of the conditionality of the break clause – that the tenant is to give vacant possession of the premises to the landlord, when the lease is terminated.

What amounts to ‘vacant possession’ in these circumstances has been well illustrated in a recent case before the Courts – NYK Logistics Limited v Ibrend Estates BV (2011). Here, the tenant served notice to exercise a break clause in their lease of warehouse premises. That clause required the tenant to give vacant possession on the break date. The landlord commissioned a schedule of disrepairs, for which the tenant was liable under the lease. Two days before the break was to be effective, the parties met on site to review what works remained to be done. The landlord said that it would send someone to collect the keys, although in fact no one was sent. At that stage, the premises were clear of the tenant’s fixtures, fittings and stock. The tenant’s contractors undertaking the repair works did not complete them until six days after the break date.

The Court held that vacant possession in the break clause had to given by midnight on the designated date and not a minute later. ‘Vacant possession’ means that the premises should be empty of people and that, in this case, the landlord was able to assume and enjoy immediate and exclusive possession, occupation and control of the premises. The tenant had remained in occupation by virtue of its contractors remaining on site to complete the repair works. The fact that the landlord could have made use of most of the premises or that the tenant could have pulled its contractors off the site at a moments’ notice were not relevant. Nor were the statements made by the landlord that it would send someone to collect the keys binding or sufficient to waive its entitlement to vacant possession.

Furthermore, a recent High Court case highlights how difficult it can be for tenants to operate a conditional break clause.  In the case of Avocet Industrial Estates LLP v Merol Ltd and Tudor Rose International Ltd the tenant sought to exercise a break clause which contained a condition that the break notice would have no effect if, at the break date, any payment due under the lease had not been paid.

The landlord claimed that the tenant had breached this condition by failing to pay interest due under the lease relating to a number of previous late payments of rent. The landlord had not made any demands to the tenant for payment of this interest when it arose.

The Court held that, whilst being “somewhat of a trap” for the tenant, payment of the interest was due under the terms of the lease and therefore the break notice was of no effect. In reaching its judgment the Court also noted that the lease did not require the landlord to serve a notice demanding the interest when it fell due, and that the tenant was able to calculate the interest owed without any real practical difficulty.

However, a significant factor in this case was the Judge’s finding that at the break date the landlord had not known that the tenant had been mistaken when it had previously written to the landlord stating that it believed that it had paid all sums due under the lease. The landlord only acquired knowledge of the outstanding interest after the break date had passed, when it had obtained legal advice as to whether the break notice could be challenged. The Court stated that if the landlord had known of the tenant’s mistaken belief on or before the break date, and had deliberately kept silent, then the landlord would have been barred, by reason of estoppel, from relying on the tenant’s non-payment of interest to defeat the break notice.

Comment

Courts have shown a willingness to apply “business common sense” when considering whether tenants have provided the requisite information in break notices.  Avocet highlights the need for landlords to avoid making any express representations as to whether or not the tenant has complied with the conditions of the relevant break clause.  I would always recommend that careful consideration should be given to whether all such conditions have been met before accepting a tenant’s purported break and read the lease!

Let’s take a step back from this though, if you know your tenant well and understand their needs and requirements you can pre-empt litigious action.  Consider the above cases: in my opinion there are other options available to both the landlord and tenant.  As a landlord if you have a strong understanding and knowledge of your tenant and realise that they may be looking to exercise their break option, take the opportunity to discuss this with them.  It may work in your favour and the tenant may surprise you.  For example, the above tenants may have been looking to action their breaks to move into larger premises, or even just to relocate to a smaller suite which you may own within your portfolio.  Early discussions about this could provide you with the option to retain the tenant on more advantageous lease terms.

Many landlords stick their head in the sand when it comes to tenant’s break notices and hope that the occupier will just miss the break notice period.  I’m not advocating highlighting the break option to the tenant, but constant dialogue with them will help to keep surprises to a minimum and will ensure that you can proactively manage your property portfolio.