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Capitol Gains: Break Clauses and Conditions Precedent

Posted on 16th November, 2020

For millions of employees, 2020 has been the year of home working. It has become an ordinary part of our lives and for many it seems to have been a positive experience, offering a degree of flexibility. One legacy of the pandemic is likely to be more flexible working, and this, in turn is likely to lead to some employers downsizing to smaller premises, or re-locating from expensive city centre premises, with employees working remotely.

Exercising a break clause in a long-term lease may well become a viable option for a tenant looking to re-locate or a landlord looking to redevelop to meet changing needs of the market.

What is a Break Clause?

A break clause is a common feature of a modern commercial lease. In basic terms, upon the meeting of certain criteria, either a tenant or landlord can bring the lease to an end before the end of the term, thereby offering a degree of malleability to both parties.

A break can operate in numerous ways, including:

  • At any time during the term (known as a “rolling break”), often after a certain period of time, i.e. after 12 months of the term has elapsed.
  • On a specific date, or at fixed intervals – i.e. after three years of the term has elapsed.
  • Upon the occurrence of an event – i.e. a “development break” to allow the Landlord to take the property back for redevelopment.

A party looking to exercise a break must consider the wording of the relevant clause carefully to understand the applicable time scales and the deadlines for and means of serving the break notice, to ensure strict compliance with the terms of the clause. A failure to comply with the terms of the break clause can be costly and could lead to an argument from the other party that the lease has not determined and therefore, the breaking party remains bound by the lease.

This is a complex area of law, with a plethora of cases on the interpretation of clauses and the various terms they contain.

Conditions Precedent

Typically a break notice must be served a number of months before the actual break date (i.e. the date the lease will actually end) and further, where a notice is served by the tenant, there will often be conditions which must be met by the tenant at the actual break date. In short, the right to exercise the break may be dependent on the tenant having complied with certain covenants contained within the lease, often referred to as “conditions precedent”.

The extent to which compliance is required depends on whether the conditions are absolute (in which case, strict satisfaction is required) or qualified (often containing words such as “reasonable” or “substantial” to provide some wriggle room).

Usually, a tenant will need to have paid all rent due up to the break date, including service charge and insurance (both likely to be reserved as “Rent” under the lease) and such a condition will be absolute. Likewise, compliance with the repairing covenant may be required and this in itself may lead to a dispute.

A condition precedent may also apply to a Landlord seeking to exercise a break, for example that it has an actual, demonstrable intention to redevelop, where it seeks to rely on a development break.
Generally, there will likely be a condition precedent that the tenant must give vacant possession on the break date. This may seem obvious, and not all that challenging to comply with but in reality, it is not always as straightforward as it appears.

Recent Case law: Capitol Park Leeds PLC v Global Radio Services Limited [2020] EWHC 2750 (Ch)
In the recent case of Capitol Park the tenant of a tower block was required to comply with such a condition. Having served the break notice in compliance with the Lease, at the break date seventeen “Fixtures” (being specific items defined as such in the lease, including suspended ceilings and floor boxes) had been removed by the tenant, but not replaced. Works to the property had begun but the tenant stopped works and instead sought to agree a cash settlement with the landlord, as is common at the end of a lease term when a claim for terminal dilapidations will follow.

The “Premises” was defined in the Lease, to include the Fixtures. As such the Landlord argued that vacant possession of the Premises was not delivered since what was returned (without the Fixtures) was less than the Premises. The landlord argued that the condition precedent was not met and the break was therefore ineffective.

The Court decided that whilst this was an “exceptional” case, the removal of the Fixtures caused a sufficiently substantial impediment to the landlord’s ability to use the property that the condition precedent of delivering vacant possession had not been met. The break was therefore inoperative. The tenant has been granted leave to appeal.

Points to note

Whether landlord or tenant, a party seeking to exercise a break must consider the terms carefully.
Rightly, attention is often given to ensuring that the break notice is served on time, by the correct method and to the correct party. Clearly this is vital, but it is not the full story and once the notice has been served attention must be given to other, relevant terms of the lease in preparation for the break.

The case above arguably provides an example of a tenant focusing on compliance with other terms of the lease, specifically reinstatement and repair (with a sensible eye on what was no doubt a significant terminal dilapidations schedule), without sufficient consideration of how it would affect the break.

The decision itself appears to put tenants in a difficult position. Vacant possession was required, but the tenant went too far, removing fixtures which should have remained and as such, it crossed the line. Where the “line” lies in such instances will depend on the terms of the lease, should be reviewed on a case by case basis and with benefit of professional advice.

Richard Flounders, Partner, Property Litigation

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