Break Clauses in Commercial Property Leases

Break clauses are usually advantageous to tenants and the courts have always applied strict rules when dealing with them.

The following two recent cases highlight some of the traps tenants have fallen into:

Case: Orchard v Reuters

The tenant, Reuters, served its break notice within the required time limits, but the landlord argued that it had not been received in time. The lease set out a procedure for notices given by hand or sent by recorded or special delivery, but specified that notices sent in any other way would be valid only when receipt was acknowledged. The tenant had sent its break notice by fax, and the landlord did not acknowledge receipt until long after the break date had passed. The Court ruled that the notice had not been validly served in accordance with the lease terms and therefore the tenant lost its right to breaking the lease term.

It is very important that you seek immediate legal advice when considering exercising a break clause, so that you do not miss any important issues relating to the serving the notice on the Landlord.

Case: The Prudential Assurance Company Ltd v Exel UK Ltd

Unless there is an express contrary provision in the lease, where there are joint tenants, a break right must be exercised by both tenants unless one of them has the authority to exercise it on behalf of the other. A lease had been granted to two joint tenant companies, Tibbett & Britten Ltd (‘TBL’) and Tibbett & Britten Consumer Corporation Ltd (‘TBC’). As a result of various company buy-outs, TBL’s name had changed to Exel UK Ltd and TBC had become a dormant company, wholly owned by Exel.

The break notice heading referred to TBC as a party to the lease, but no reference was made to it in the body of the break notice, only to Exel. The landlord argued that, since the break right could only be exercised by Exel and TBC acting together, or by their permitted assignees, it could not tell from the break notice whether there had been an unauthorised assignment to Exel only, or whether Exel was purporting to exercise the break right on behalf of both companies. From an objective viewpoint, it was not clear that the notice had been served on behalf of both companies, and the Court agreed that the notice was invalid.

This case suggests that adequate thought should go into serving a notice and that it is not a mere administrative exercise. You are therefore advised to seek legal advice before serving the notice.

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