Do you understand your break notice clauses? – Advice for those who lease commercial buildings
Some leases of commercial buildings contain a right to terminate a lease early, either at a fixed point or on a rolling basis after a certain point, which allows a tenant (and sometimes also the landlord) to terminate a lease early. This is called a break right or break option.
There are a number of grounds on which a break notice can be found to be invalid, including:
• Not serving it on the landlord within the time frame prescribed by the lease – often six months before the break date.
• Not serving the notice on the landlord in the correct manner, in accordance with the notice provisions in the lease – which will usually require the notice to be sent by special delivery or served by hand to the registered office of the landlord or the address contained in the lease.
• Not including the correct or accurate information (however small the error) in the notice – the law requires that certain information is included, in addition to any requirements contained in the lease. For example, a notice will be invalid if the incorrect landlord name is used.
If any of the above or any other errors exist, the notice will be deemed invalid and the break will not be exercisable.
In a Court of Appeal case last year (Seimens Hearing Instruments Ltd v Friends Life Ltd), a tenant break notice was held to be invalid because it did not contain “meaningless words” prescribed by the lease. This illustrates just how strictly break clauses are dealt with by the courts.
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 service charge, 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 can be avoided by ensuring that break options provisions are correctly drafted when a lease is first prepared, so that it is entirely clear what a tenant needs to do in order to successfully operate their break clause.
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