Who can exercise a break clause in a commercial lease?
A recent case (Sackville UK Property Select II (GP) Ltd v Robertson Taylor Insurance Brokers Ltd) found that a break notice served on behalf of the assignee of a registered lease, who had not yet been registered at the Land Registry as the owner of the leasehold title, was insufficient to end the lease. The break notice should have been served by the original tenant who, until the assignment was registered, remained the tenant of the lease.
The case is a reminder of some important points:
- As with any registrable dealing with registered property (such as purchase, a lease of more than seven years, assignment where there is more than seven years left to run on the lease and a charge), it needs to be registered at the Land Registry to bind successors and be fully enforceable in law. This is the case even where the assignment is an intra-group one between closely related companies.
- Break clauses are strictly interpreted – if there is even the smallest error in the form or method of service of the break notice or if any of the conditions to the break option have not been absolutely complied with then it will be invalid and the break ineffective.
A failure to successfully operate a break can have extremely serious and adverse consequences for tenants. It can mean that they are then tied into the remainder of a lease term, which can run for a number of years, during which they will have to continue to pay rent and any other charges, even though the main purpose of the break clause may well have been to escape from the financial burden of the remaining term of the lease. There is then a danger of a tenant ending up in an insolvency situation.
It is therefore extremely important to seek professional advice before accepting or serving a break notice. Many problems for tenants can be avoided by ensuring that break options are carefully drafted at the outset, and in compliance with the Code of Leasing Business Premises in England and Wales 2007, so that it is entirely clear what a tenant needs to do in order to successfully operate their break clause.
Fenella Eddell is a solicitor in the property department at Barker Gotelee, Suffolk solicitors.