Break options
Planning for an early release
Both tenants and landlords have used the
“Break Option” frequently over the past
number of years. Jackie Buckley explains
why it’s not always easy to make the break.
As the property market declined in
recent years, tenants were unwilling to
tie themselves in to long term leases and
wanted to ensure that they had a way
of getting out of the lease should things
not go according to plan. For their part,
many landlords were keen to keep up
occupancy rates so offered bargain prices
but wanted to avoid tying themselves into
long-term leases at recession-level rents.
Contested break options
While landlords may initially have been
happy to give break options, many have
been reluctant to allow their tenants to
exercise those options. When a landlord
is served with a Break Option Notice,
their typical opening position is to look
at whether or not they can contest it and
prevent the tenant from validly breaking
the lease. A number of recent cases
have dealt with the issue of how strictly
a tenant must comply with the preconditions set by a landlord.
If a tenant has agreed that it will only
exercise a break option once it has
complied with certain pre-conditions,
the landlord will look to whether the
tenant has met those pre-conditions in
accordance with the lease. Typical preconditions include payment of a penalty,
compliance with on-going covenants,
compliance with financial covenants
and complying with repair covenants in
the lease. For example, if a tenant has
agreed to comply with covenants before
exercising a break option, it may be
quite easy for the landlord to deny the
tenant the break option by relying on
an immaterial or technical breach of the
lease.
Plan for a clear break
Some recent UK case law has addressed
this issue. In Siemens Hearing Instruments
Limited v Friends Life Limited, the Court of
Appeal addressed whether or not a Break
Notice served by a tenant was invalid and
considered how strictly one must comply
with pre-conditions. The case involved a
25-year lease with a tenant break on the
giving of six months’ notice under Section
24 (2) of The Landlord and Tenant Act
1954. The tenant served a Break Notice,
but did not refer to this specific provision
of the Act. The Court of Appeal eventually
ruled that the Notice was invalid and the
tenant was denied its ability to break
the Lease. Lewison L.J. commented that
“the clear moral is: if you want to avoid
expensive litigation and the possible loss
of a valuable right to break, you must pay
close attention to all requirements of the
clause including the formal requirements
and follow them precisely”.
In Arlington Business Park G.P. Limited v
Scottish and Newcastle Limited, the case
involved a lease providing that the tenant
could terminate on a specific date on
giving 12 months’ notice — provided that
it was not in breach of its obligations at
the date of service of the Notice and the
termination date. This caused difficulty
in this particular case as the tenant was
in breach of its repairing obligation
when the Break Notice was served, even
though it had been complied with by the
termination date. The Court ultimately
held that this provision meant that there
was to be no breach of the repairing
obligation at both dates and therefore
the Notice was ineffective, so the lease
remained in existence.
Based on this case law, tenants should be
wary of what they agree to when they are
negotiating the inclusion of break clauses
with their landlords. From the tenant’s
point of view the preferable position is
that the break is not conditional at all —
but this may be difficult to achieve in the
current climate. At the absolute minimum,
both the landlord and tenant should
agree between them a sensible approach
to the conditions that must be complied
with before the tenant will be allowed to
exercise the break, and what will prevent
the tenant from exercising the break if it
does not comply with them.
If you require any assistance in relation to
Break Clauses please do not hesitate to
contact a member of the Hayes Property
& Private Client Team.
Jackie Buckley / Partner
jbuckley@hayes-solicitors.ie
www.hayes-solicitors.ie
Winter 2014 In Brief 7