In the present market, landlords will do what they can to avoid being left with empty premises says Leanne O'Brien, partner in the Commercial Property team at Capital Law. Here, she analyses how tenants can ensure this doesn’t leave them with empty pockets over a break clause negotiation.
It is common to see landlords attempting to fetter tenant break options, over potential invalid claims, such as claims based on conditions in break clauses, that are not being complied with. This serves to further stagnate an already slow market, by scaremongering tenants into staying put. By following the advice here, tenants can ensure a hidden condition doesn’t put the brakes on the removal van.
In some cases, the drafting of a break clause is such that any breach of the conditions, however minor or trivial, will prevent the break from taking effect. If the clause is of this kind, strict compliance will be necessary. A break clause is a type of option, and options are always strictly construed. This is not only particularly important in respect of time limits, but also conditions for exercise of the option.
If a tenant seeks to comply with an absolute or conditional clause it must:
(a) Give detailed line-by-line consideration to what it is required to do in order to ensure that it has complied with each and every covenant and obligation in the lease. (This may range from compliance with the covenant to pay rent to the covenant to deliver up vacant possession);
(b) In the event of any doubt, take a conservative line and avoid scope for any argument as to non-compliance;
(c) Draw up a generous timetable setting a date for completion of each of the matters that it must comfortably put in place before the break date;
(d) Appoint a firm of surveyors with experience of break clause compliance, and the issues that this will raise, to inspect the premises by reference to all the documents available and as soon as possible;
(e) Obtain a copy of the planning file and the building regulations files from the local authority, if necessary;
(f) Attempt to engage the landlord in a dialogue regarding reinstatement and a terminal schedule of dilapidations. The aim is to try and reach agreement as to what work the tenant is required to carry out, and to secure the provision of any documentation that the tenant may not have;
(g) If the premises are to be decorated in colours of the landlord’s choosing, the landlord must be asked to provide its decision;
(h) Ensure that everyone working on the project understands the importance of the task at hand and the standard to be achieved by the break date;
(i) In the case of a qualified covenant, where material or substantial compliance is required, take early advice from a commercial lettings expert.
Fortunately, in many modern leases, tenants’ advisers have very sensibly resisted the exercise of the break clause being conditional on absolute compliance with the tenant’s covenants. The relevant words of qualification are often to the effect that the lease will not determine if the tenant is: “in material breach of any of its covenants contained in this lease (including those contained in this sub-clause) at the [Relevant Date]”.
Common alternatives are:
• That the tenant should have committed no “substantial” breach of covenant which is subsisting on the termination date;
• That the tenant should have “reasonably” performed his covenants; or
• That the tenant should have undertaken to pay the cost of remedying any breach found to exist on the termination date.
At one end of the spectrum it is clear that a trivial breach will not invalidate the tenant’s right to break if the break clause is qualified in this way. At the other, it is probably equally clear that a total failure to comply with an important obligation in a lease, such as a covenant to keep in good decorative condition, would not amount to “material” compliance with covenants. There are going to be many shades of grey between those two sets of circumstances, and not just of the colour the tenant may paint the walls.
Even though a landlord is free to ignore attempts by the tenant to engage in dialogue as to the extent of the works required in order to comply with the conditions attached to the break, it’s always good to talk. This must be the safest and most sensible approach for a tenant to adopt if it is attempting to comply with its covenants. If a tenant engages the landlord in discussions about the works, potential issues of misrepresentation may later arise, should the break be challenged.
The real lesson of course, is to attempt to avoid the issue altogether if possible. In any case where the tenant wishes to place the determination of the lease beyond doubt, the best course for a tenant to take must be to open negotiations with its landlord, and to attempt to secure the right to break on payment of a premium, and not by reference to performance of its covenants and obligations under the lease. By following all of this advice, you can ensure the small print doesn’t put the skids on your plans to relocate.
Leanne O’ Brien. Property News 6 June 2012 (http://www.propnews.co.uk/issues/2012/06/articles/19/make-or-break-don-t-get-caught-with-empty-pockets-over-a-break-clause)
About the author
Leanne O’Brien is a partner in the Commercial Property team at Capital Law (www.capitallaw.co.uk). She likes to unwind after a busy day in the office by running and has participated in the Cardiff Half Marathon for the past four years. All her sponsorship money has gone to the Motor Neurons Disease Association, a cause close to her heart.