Ending property leases for HR professionals - Part 3: Breaking up
We've teamed up with Commercial Property Partner, Suzanne Gill, to bring you some helpful guidance on downsizing business premises – a task that often becomes the responsibility of HR. In the third in this series, Suzanne looks at break clauses.
Some leases allow tenants to end the lease on notice to the landlord – a “break” notice. This can be on a specified date or dates, or at any time after a certain date.
Break clauses are one of the most contentious part of leases and it's important to comply with the procedure exactly. If the lease specifies that the break notice must be on blue paper, blue paper must be used. Many tenants have slipped up by sending the notice from the wrong company within the tenant's group of companies, or by sending the notice to the wrong landlord.
However, following the procedure to the letter is only the start of successfully exercising a break clause. If there are pre-conditions to the break right, these too must be met. There are plenty of traps for the unwary here. For example, the lease might require “all rents” to be paid up to date before the break notice expires. The trap here is that if rent is paid late, the landlord has the right to charge interest on the late payment – and that interest is often a type of rent. Historic late payments of rent could have created liability for relatively small sums of interest. That interest might need to be paid in order for the break to be successful, whether or not it’s actually been demanded. Finding out what exactly is owed can be difficult if the landlord is not cooperating. The landlord's calculations might differ from those prepared by your accounts team and so it is wise to keep on top of any arrears.
Worse still for a tenant is an obligation to have complied with the tenant’s covenants in the lease (or a variation such as “materially complied” or complied with all “substantive” covenants). The issue here is the repairing obligation. Tenants have come a cropper with a break clause by trying to leave the premises in good repair, but then discovering the works over-ran the programme. Leaving rubbish or items to be collected at a later date could also stop the break from working. And there’s no obligation on the landlord to co-operate either. In a falling property market, some landlords will use every trick in the book to keep their tenants on the hook and paying rent for as long as possible.
When considering breaking a lease, the most important thing is to plan, plan, plan ahead. If the procedure isn’t properly followed, the tenant company could be liable for another five years’ rent or more, so it’s worth taking advice on what’s required.