20th Dec 2016

Leases - Check for hazards before making a u-turn

There’s plenty of case law about break clauses and the lengths to which landlords and tenants will go to establish that a tenant’s break clause has or has not been validly exercised, but what about the more unusual situation where a tenant changes its mind about a break notice?

I was called by a surveyor this week who wanted a quick bit of advice.  His client, a tenant, had the benefit of a break clause in a lease of some commercial premises.  The client had exercised that right by serving written notice on the landlord, but that was some months ago.  Circumstances had since changed – its business was on the up again -  and the client wanted to withdraw the notice.  Presumably the landlord would be only too delighted to discover that its tenant, rather than moving out and leaving it with an empty building, would be staying on and seeing out the full length of the term, so both could simply agree that the notice was treated as withdrawn and carry on as if nothing had happened?  Or, if the landlord was not prepared to go along, or even if the tenant didn’t want to bother the landlord, the tenant could simply stay in the premises at the end of the notice period and thereby establish that the one of the pre-conditions for exercising the break (the giving up of vacant possession) had not been satisfied therefore the lease could carry on as before?  Simple no? 

Well, no.  Once a tenant has served a written notice to exercise a break, it cannot be withdrawn.  If the giving up of vacant possession is a pre-condition to the valid exercise of the break, for the tenant to remain in occupation will only work to perpetuate the existing lease if the landlord and tenant are in agreement and will not work if the landlord genuinely wants the property back (perhaps because rental values have gone up significantly and it feels it could get a higher rent by re-letting) and chooses to waive that condition.

Odd as it may seem, if the landlord and the tenant both agree to waive the break notice, this doesn’t stop the lease from coming to an end.  It operates as the implied grant of a new lease from the day after the break date.*

There are some practical consequences of the grant of a new lease, which have potentially serious implications for both parties (but particularly the landlord if it doesn’t act to deal with them), for example:

  1. The existing lease may have been contracted out (i.e. the tenant’s protected rights to a new tenancy at the end of the term were excluded from the existing lease), but the new implied lease will not be contracted out;
  2. If the lease is an underlease, will the new implied lease require superior landlord’s and/or mortgagee’s consent and will the landlord therefore be in breach of its mortgage and/or its superior lease if it fails to get that consent?;
  3. If the existing lease was guaranteed, that guarantee will be lost;
  4. If there are underleases, then they also will be brought to end if the main lease ends, but new ones may be implied, with the same consequences as for the main lease.

(*Just to confuse things, interestingly, HM Revenue & Customs take the opposite view that, if a break notice is withdrawn before it takes effect, the lease will be treated as continuing for SDLT purposes, therefore no SDLT should be payable unless the main terms of the lease (rent, term, demise) change.  This just goes to show that the law on this subject is arguably in need of change.)

So the moral of the story is:

  • a) Tenants, think very carefully before exercising a right to break (I’m sure most do); and
  • b) Landlords, think even more carefully about choosing what may appear to the cheapest and most expedient way of allowing the tenant to make a u-turn.    

Richard Wheeldon is a specialist in Commercial Property law and a Consultant at Berwins Solicitors 

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