When considering whether to exercise a break option the commercial case is correctly at the front of occupiers’ minds. However, sufficient time should be afforded to consider the legal mechanics required to effect that commercial decision. An exercised break option has a significant impact on both landlord and tenant, so it follows that the law places a significant emphasis on how break options may be validly exercised. Generally speaking, two types of break options are encountered;
(i) a less common rolling break option – exercisable at any time and either open ended or alternatively after a certain period; or
(ii) the more common fixed date option – usually linked to a rent review date.
Potential for negative impact on operations aside, rolling breaks cause less anxiety as where an error occurs such that a break notice is invalid, the serving party can mend its hand and re-issue at the next available opportunity.
Fixed date options are a different beast entirely and below are some material points that should be considered early in the process;
• Notice – Save the date
Best drafting practice is for the break option clause to specify the exact date on which the break is to occur. More often than not best practice is not followed and “at the expiration of the “xth” year of the Term” appears, which manages to cause avoidable confusion.
The law implies that time is of the essence in serving notice, regardless of whether the statement actually appears in the particular clause.
If the actual date on which a break is to occur is unclear due to poor drafting or otherwise, the notice served should refer to the clause and not the date. Citing the incorrect date can be fatal to validly serving a break option notice whereas citing the clause and remaining silent on the date can provide protection against that misstep.
Additional terms can also be implied into break option clauses. For example, in the rare case a break option is stated to be exercisable “at any time” it should be read as being exercisable “at any time…where no fundamental breach persists”. Detailed examination of the lease, in its entirety, is recommended prior to issuing any notice.
• Compliance with covenants – Conditions precedent or subsequent
Where break options are conditional, additional caution should be taken to remove as much ambiguity as possible from whether the break option was successfully exercised. A lease should state whether the conditions are to be satisfied on the date notice is served or the “Break Date” [usually 6 / 9 / 12 / months following service] or both.
Leases granted in mid-2000s in particular contain break option clauses where tenants are baldly required to be in compliance with their covenants in the lease. Tenants bound by such leases are in a far more uncertain position as the requirements for successfully exercising a break option are opaque and so landlord favourable.
However, a landlord should not benefit where it entices a breach. A court will not look favourably on a landlord that essentially misleads or allows a tenant to be misled in thinking all was well only then at the eleventh hour to list matters which the tenant cannot comply with. Early engagement is key to both correctly serving notice and validly effecting that service. The sooner engagement occurs the stronger a tenant’s case in the event of dispute. Where a landlord will not engage but it is not clear that the landlord is being unreasonable this throws up a completely new set of circumstances outside the scope of this note.
Save where the clause is structured in a particular way, a tenant should not fully rely on a clause which states that operation of the break option will be without prejudice to any rights that may exist in respect of antecedent breach. The presence of such a statement does not lessen the requirement that a party satisfy conditions of the break option and it is a common misconception to believe notice can issue in anticipation of an arm wrestle around dilapidations / damages in due course.
• Payments: More is definitely more
A well drafted lease will have provisions detailing by which date a landlord is to notify the tenant of the sum payable on the break option date. However, the majority of leases do not contain this provision.
In such instances where payments are to accompany a notice and the payment sum is not clear, a tenant should consider making an overpayment, marking such payments as being made without prejudice. Whilst likely encountered in more significant lettings, any overpayment should to be viewed against the cost of maintaining the lease with pound wise and penny foolish economics being applied. Marking such payment as being without prejudice assists in rebutting a landlord claim that it is not obliged to return an overpayment.
Calculation of the payment due should not be a rough calculation and sufficient time to consider the exactness of the payment will assist. For example, where prior payments required to be made under the lease were late [say pending determination of service charge issues], default interest on the sum due should be added to cover the period of tardiness.
• No creative licence: Mannai
As the impact of break options is significant they are, like other options, strictly interpreted by the Courts.
The principles set down and re-stated in the UK Mannai case are informative and show why precisely following the conditions of the break option clause is critical. Where a notice is required to be served by post but is actually served by email the notice will be invalid. Rather than reciting tracts of this judgment the following nutshell is on-point; “The fact that the landlord realises that the tenant intended to take advantage of his rights under the proviso, but has only failed through some mistake to give the required notice, is irrelevant. The simple fact is that the tenant has failed to use the right key which alone is capable of turning the lock”. The fundamental to be followed is where a form of notice is specified in the lease, that form must be complied with.
Where no such form is set out in the lease, a court has discretion in interpreting what a reasonable recipient would have considered the notice to mean. Neither landlord or tenant wants to find themselves in this position and so following the above suggestions, in addition to engaging lawyers early in the process, is the best approach in plotting your way through this process.
For more on any aspect of the above please contact Tom Conway or your usual Philip Lee contact.