April 6, 2011

Break notices – when is one effective?

Options to break grant an opportunity to revisit a commercial lease and consider whether the landlord or tenant’s needs have changed since the lease was entered into, possibly allowing for the lease to be brought to a premature end. In an economic climate an option to break is critical to companies tied into leases they find no longer meet their requirements.

It is vital that a tenant who wishes to exercise their break right does so correctly by following the provisions in the lease which deal with the required form and service of the break notice. These provisions will usually require written notice to be given at least 6 months prior to the date the lease is to be terminated and for the notice to be acknowledged by the landlord.  

In the event that the break right and notice provisions in the lease are not followed, the tenant takes the risk that the notice will be ineffective. This means the tenant will miss the opportunity to determine the lease and will be committed for the rest of the term.

Recent cases such as Orchard (Developments) Holdings Plc v Reuters Ltd emphasise the need for care and attention when serving such a notice to one’s landlord. In this case the tenant had served a break notice before the deadline six months prior to the lease anniversary but it was served to the wrong address. The landlord’s solicitors only acknowledged the notice when further notices were sent by fax, after the 6 month deadline. The Court of Appeal held the tenant’s break notice was ineffective.

Any tenant who wishes to exercise their break right should consider the following points before proceeding:

  1. The notice must be served by the lawful tenant or their solicitor/agent. The tenant or tenant’s solicitor is obligated to investigate the situation to make to make sure the correct party serves the notice.
  2. If the lease specifies that the notice must be in a particular form then those provisions must be followed when drafting the notice otherwise the notice will be invalid. 
  3. The notice must be served in accordance with any mandatory requirements set out in the lease and the correct notice period must be given. The tenant is also minded to check any prior obligations that must be satisfied at the same time the notice is served. Usually it is specified that the tenant’s covenants must have been complied with up to the date the notice is served, including having paid rent and service charges. Again the tenant’s solicitor must check these points before the notice is served.

Whilst a break can be a valuable means of escaping commitment to a lease, any party considering their right to break should be careful as case law suggests there are many points to consider before serving an effective break notice.

Click for information on Holmes & Hills' Commercial Property services. 

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