Break clauses are like break ups; some are messy, some are clear cut, some blatantly favour one party over the other, and some are so convoluted that neither party knows where they stand when the time comes to call it quits. A well-drafted break clause should be concise and specify exactly what actions need to be taken by each party and when, based on a range of reasonably anticipated future scenarios. This will save landlords and tenants alike both time and money (not to mention mental wellbeing). But what happens when the reasonably unforeseeable occurs?
Amid uncertainty around the duration of lockdown measures following the outbreak of Covid-19, owners and occupiers of commercial premises will be considering the impact on their occupational arrangements for those premises. Whilst much commentary has surfaced around the technical aspects of terminating a commercial lease and the potential to rely on the pandemic as a ‘force majeure’ event (and whether this is particularly helpful in the context of a commercial lease), surveyor Andrew Challinor of Challinor & Co raised with me a pertinent, practical question that he has recently encountered with a client – ‘how does a commercial tenant who has served a break notice comply with pre-conditions attached to the break amidst a lockdown environment?
The thing about a break notice is that once served, it cannot be withdrawn. A strict approach is taken at common law to the construction of break clauses, and time is always of the essence (unless the lease states otherwise). Despite the redirection of attention and resources to business-critical issues resulting from Covid-19, the parties to a lease must remain cognisant of the dates recorded in the break clause (including the requisite notice period and the specific date of, or period within which, the break can be exercised) because if missed, the break right will be lost.
Provided that the break notice has been served in accordance with the provisions of the lease then, subject to compliance with any break conditions, the lease will end on the date specified in the notice and the parties will be released from all future liability.
If the lease imposes conditions that must be satisfied before the exercise of the break, then these must be complied with. Otherwise, the break notice will have no effect and the lease will continue beyond the break date as if the break right had never been exercised.
Commonly, break clauses will contain the following conditions:
- the tenant paying all sums due and owing under the lease up to and including the break date; and
- the tenant handing over the premises on the break date with vacant possession, which usually involves removal of fixtures, fittings and any third party occupiers.
Both of these common break conditions could be problematic for tenants who have served, or who are looking to serve, a break notice on their landlord with a break date that will occur sometime during the next few months.
The Coronavirus Act 2020 prevents landlords from exercising their rights of forfeiture from 25 March 2020 until 30 June 2020 (or such longer period as the government deems necessary) if a tenant falls behind on rent payments. Irrespective of this, tenants will need to consider the impact of any non-payment of rent on the exercise of their break because it could render the break invalid. Similarly, the lease may contain rent cessation provisions triggered by certain events (that may include pandemic) or separately negotiated between the parties, and the effect of any concession on the break should be assessed.
Case law has established that the term ‘vacant possession’ has a strict legal meaning that can require significant work to be undertaken by the tenant at the premises in order for vacant possession to be achieved. The government has issued stringent measures to minimise contact between people, which means that many business premises have closed, and businesses are operating only to the extent possible whilst maintaining social distancing. Accordingly, the question arises as to how tenants can even access premises to remove assets and reinstate premises to satisfy a vacant possession condition? Not only is there a potential logistical issue around moving assets and getting contractors on site to carry out necessary works, but the landlord may have closed and secured the property within which the demised premises is located. Further, landlords may not be in a position to carry out a final inspection of the premises and disputes could later arise around whether or not the break conditions had been complied with.
Where possible, an open dialogue with the other party to the lease is preferable. For example, a landlord may agree (although is not obliged) to waive some break conditions where compliance is impractical or impossible. Conversely, if a break notice has not yet been served, then the parties may utilise an approaching break right to reconsider their bargaining power in the market. For example, in order to secure continuous occupation of their properties, landlords may be willing to negotiate variations or new leases that incorporate incentives like rent-free periods, and less onerous tenant covenants, to reflect the declining market for commercial premises in many sectors.
The starting point is always to review the terms of the lease, which should provide guidance around what would be expected of the parties in normal circumstances. In the extraordinary circumstances that currently exist, professional advice should be sought to assist landlords and tenants with the technical and practical difficulties that are presented. Seeking advice at an early stage will ensure that you achieve the intended outcome with as little risk, not to mention stress, as possible.
Lillee Reid-Hunt (commercial property lawyer) has extensive experience acting for both landlords and tenants on commercial leases, including the technical aspects of exercising breaks, and Andrew Challinor (corporate real estate advisor) has over 25 years of experience in providing high level tenant representation to both SMEs and some of the largest corporate occupiers in the UK.
Please feel free to drop us a line or give us a call if you would like to discuss the potential implications of Covid-19 on your occupational arrangements, or require any assistance or advice with any aspect of your commercial lease.
This article is for general awareness only and does not constitute legal or professional advice. Law and guidance relating to the COVID19 pandemic is continually being updated and the law may have changed since this page was first published. If you would like further advice and assistance in relation to any issues raised, please contact us today by telephone or email firstname.lastname@example.org.