June 4, 2015

Don’t assume triggering your break clause will be easy

The recent case of Sirhowy Investments Limited -v- Henderson and Knight acts as a reminder that some break clauses are extremely difficult for the tenant to exercise, making the break clause of very little value to the tenant in real terms.

It is not enough to know you have a break clause in your lease - you need to pay close attention to what hoops you have to jump through if you want to exercise the break and end your lease early. In this case, the break clause required full compliance with the tenant covenants. In other words, the tenant had to comply with all its obligations, including returning the property “in good and substantial repair”. This is a notoriously difficult condition, because the landlord can always claim something has not been left in repair, so that the break is ineffective and the lease should continue.

The case had many subplots resulting from the tenants’ new 10-year lease of land in Pontilanfraithm where they operated a car sales and repair business. From the start, Mr Henderson and Miss Knight had negotiated the right to break on three months' notice in the event that the local planning authority objected to their use. When the local authority did object, and despite the landlord’s challenge to the validity of the break on those grounds, the real turning point came down to whether the premises had been put back into repair at the time of the break. The landlord (Sirhowy) threw every item of disrepair into the mix even complaining that the tenants had breached a covenant not to keep livestock by allowing their dog to join them on the land. Although the court rejected the dog point, it held the break clause would only take effect if the premises were in good and substantial repair at the expiry of the notice period.

This level of compliance is something that a well-advised tenant should never agree to as a break condition, as the courts have made it all too clear that full compliance is near impossible to achieve. If a conditional covenant is to be included, it must be qualified to ensure that only material compliance is necessary. Ideally, the condition should be removed altogether.

To conclude, what happened to the tenants and to emphasise the above point, the court found that the entire issue would come down to whether or not a perimeter fence had been adequately repaired. It had previously been patched following a break-in and despite the tenants’ arguments that this was a substantial repair, the court held that it was, on strict reading of the lease, a breach of the repairing covenants. The break was therefore ineffective, leaving the tenants out of pocket for £70,000 plus costs. The experience became extremely costly for the tenants but also one which, if well advised, could have been avoided at the drafting stage by removing or watering down the condition.

Both tenants and their advisers should be aware of the court’s approach, particularly as the unwary practitioner could also find himself liable for failing to adequately advise the tenant.

To mention just another case briefly, the Court of Appeal dealt another warning to tenants and property professionals alike in the case of Marks and Spencer plc - v - BNP Paribas.

Here, M&S failed to persuade the court that an over-payment of rent for the remainder of the quarter (following the break) should be returned by the landlord. This and the Sirhowy case (above) emphasise that, where breaks are concerned, the court will expect strict compliance with all break conditions and is likely to steer clear of ever adding or implying terms into a commercial lease.

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