23 October 2009 by Yezdan Izzet

Breaking the lease tenants beware

Taking into account the current economic climate, it is no surprise that commercial tenants are looking for ways in which to bring their leases to an end especially where it may not be an option to sell.

As a commercial tenant you may be pleased to hear that you do not necessarily need to wait for the term of your lease to expire before giving the property back to your landlord as many commercial leases contain a “break clause” giving the tenant (and in some cases also the landlord) the right to end the lease at an earlier date.

However, due care must be given when exercising a break clause to ensure that a valid notice is served. This is particularly important when dealing with a lease which contains a “specified break date” (i.e. where you can only terminate the lease on a specific date) rather than a “rolling break clause” (i.e. where, unsurprisingly, you can terminate your lease at any time after a particular date) because if you fail to serve a valid notice you may lose the opportunity to end the lease.

This was brought to light by the Court of Appeal earlier this year in the case of Orchard (Developments) Holdings plc v Reuters Limited 2009. In this case the lease contained a specific break clause stating that the tenant could terminate the lease on the fifth year or the tenth year of the term. The only conditions were that the tenant was required to give “six months previous notice in writing” and vacant possession of the property on the termination date. Although this seemed pretty straight forward the tenant got it wrong!

In an attempt to exercise the break clause the tenant served notice in writing on the landlord by way of post and fax. However, it later transpired that the letter sent by post was delivered to the wrong letter box and was ineffective. As such, the tenant could only rely on the faxed notice in arguing that this constituted a valid notice and in doing so the tenant argued that the landlord had accepted the notice by acknowledging the fax.

The Court of Appeal considered all terms of the lease (not just the break clause) and decided that the notice was not valid as it did not comply with the notice provisions of the lease which stated that any notices were only valid if “given by hand, sent by registered post or recorded delivery”. The fact that the landlord acknowledged the fax was immaterial as the faxed notice was invalid.

As such, the tenant’s lease remained in place and the tenant continued to be liable under the terms of the lease including payment of rent to the landlord.

If you are considering exercising a break clause it is vital that you seek legal advice as it is common for each lease will set out different requirements as to what constitutes a valid notice, whether the notice needs to be in a specified form and what method of service will be accepted and if (like in the case above) you have a specified break date you may only have one chance to get it right…!

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