The Ultimate Break Clause

Let’s imagine you’ve bought a prime shop property let to a blue-chip multiple retailer on an institutional lease for term 20 years, with 5 yearly upward-only rent reviews to market rent and tenant break clause at year 15. The initial yield …For further reading, please visit LandlordZone.

Tenant Break Clause

It is fair to say that landlords dislike tenant-break clauses for their own sake, but are generally accommodating. The tenant’s right to break gives the tenant … For further reading, please visit LandlordZone.


Important - Take Notice

Amongst the many aspects of my work I love is lease analysis. Possibly it’s the same reason many people enter the legal profession, but for me the prospect of being able to pour over every word and phrase and get bogged down in detail is stimulating. Perhaps because investment is mostly about finance and business about numbers, there is a tendency amongst landlords and tenants to focus on the figures, but as I say on my website, “to arrive at the right figure, the words must add up”

For the most part, rent review, break-clause, and lease expiry involves some form of notice. A notice is an integral part of the procedure, not a stage that can be skipped. Many people don’t seem able to word a notice correctly, even though prescribed forms and, sometimes, as at rent review, the lease will make it clear what must be said. I prefer to serve the notice to ensure wording is correct, but where I am asked to take over negotiations started, increasingly I am finding that no thought has been given to the validity of the notice. Checking the correct name of the parties comes under the category of ‘from, to and upon whom’ the notice is sent, addressed and served. It may be necessary to require proof of title, when the landlord on the notice differs from the tenant’s knowledge. The same applies in reverse, sometimes more so. Years ago, when the previous Labour Government dangled a carrot of 10% corporation tax in front of un-incorporated businesses in exchange for incorporation, many tenants took the opportunity to incorporate, but did not apply or did not realise they needed to also apply to their landlord for assignment of the tenancy. Especially when rent is paid by standing order, a landlord should be careful to check the payee is the same as the tenant, otherwise it could be reasoned successfully the landlord has deemed to waive requirement to assign. Where landlord’s inexperience or ignorance of the facts is exploited by an individual tenant that has become incorporated the position is harder to regularise where that individual refuses to be guarantor. And, in a matter I am dealing with, the position is even more complicated where the tenant has died, a successor takes over the business, pays the rent and the first the landlord hears about it is when a rent review memorandum in required in the name of the successor’s company. For some landlords, it makes no difference who the tenant is as long the rent is paid, but letting a tenant off the hook of a direct covenant can cause problems.

Notices concerning a break-clause must be worded and served correctly. The place of service may sometimes be at a different address to the lease: Claire’s Accessories UK Ltd v Kensington High Street Associates PLC [2001]. The name of the tenant must be correct: Procter & Gamble Technical Centres Ltd v Brixton plc [2002] Acknowledgement may be important: Orchard (Developments) Holdings Plc v Reuters Ltd [2009] Compliance with the prescribed manner in the lease is vital: per The Hotgroup Ltd v The Royal Bank of Scotland PLC [2010], “no notice will be deemed to be validly served unless... ” was enough to invalidate. Unlike at rent review and break-clause where an invalid notice could mean the landlord losing the right to review or break, or the tenant losing the right to object to the proposal or break, the consequences of an invalid notice at lease expiry may not be so dire.

Unless critical to end the tenancy on the contractual expiry, it is a question of whether landlord or tenant should get in first, since only one notice can be served. The only requirement is not less than 6 months or more than 12 months notice must be given to end the tenancy. On expiry of a tenancy, it is not necessary for the end-date in the notice to be the same as expiry of the term, provided the notice end-date is no sooner. However, with a s26 notice, the tenant can request the new tenancy to start up to 12 months from that date of notice. So, it is not only the date of the notice that matters but also the end date, and those dates can only be determined by the tenant’s intentions, and informed opinion regarding the market. One mistake is for the end date to be earlier than expiry of the contractual term. Whether the mistake should be pointed out sooner or later, or taken advantage of with a s26 notice, depends on tenant’s intention and market rent. With a s25 or s26 notice, the proposals for the new tenancy, assuming no opposition to renewal, must be set out in full, with details of any material changes to the tenancy. A common mistake is that the proposals for the new tenancy do not spell out in detail the extent of the demise, even though the wording in the Act is clear and mandatory: under Section 25(8) of the 1954 Act (as updated by the Regulatory Reform (Business Tenancies) (England and Wales) Order 2003) a landlord’s friendly notice “shall not have effect unless it sets out the landlord’s proposals as to: (a) the property to be comprised in the new tenancy (being either the whole or part of the property comprised in the current tenancy)... ”.

It is, in the absence of case law to date, a moot point whether the extent of a demise has to be spelt out in detail if the property in the new tenancy is the same as the existing tenancy. But where the property to be comprised in the new tenancy is not set out in detail, there is ground for successfully challenging validity of the notice. When validity is challenged, I am often referred to Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997], the House of Lords stating that “if a notice unambiguously conveys a decision to determine, the court may nowadays ignore immaterial errors which would not have misled a reasonable recipient. ” However, that may be so in the case of a time-limit or wording in a unilateral tenancy contract, but per Burman v Mount Cook Land Ltd [2001] it was held that a landlord’s statutory notice was invalid because it did not comply with the statutory requirements.

Where the extent of the premises is not detailed and where the application date has been extended by deferment, and even though that merely changes the end date in the notice, not the procedures, it could be reasoned the tenant has lost the right to challenge validity of the notice through part performance. The only case, of which I am aware, is Keepers & Governors of the Possessions Revenues & Goods of the Free Grammar School of John Lyon v Mayhew [1997], where the tenant’s counter-notice assumed validity and by carrying out LTA54 procedure, the tenant represented that s25 notice was a good notice. That decision predated the 2003 Order so, arguably, there is nothing to prevent a tenant from successfully challenging validity at any time before it is necessary to apply to the court; although leaving it to the last minute would be risky, since it is unclear whether there is efficacy in a ‘without prejudice’ claim — which would be necessary to protect the tenant’s interest in the event challenge were unsuccessful. The proposals for the new tenancy must be set out in detail but the rent can only be a rough guide because it is not possible to value for the future. So, whilst I do not think a tenant or landlord could be admonished for proposing a rent at a level were the tenancy to start from the date of the notice, I think a tenant or landlord would be open to undermined-credibility for proposals that would be unrealistic now. I think that because the court is likely to take an active role in preliminary proceedings, the actual figures of which the court would be aware at the case management conference and so on should be as close to the market rent, as defined by s34 and s35 LTA54.