Always test the condition of your breaks!

Sirhowy Investments Limited v Henderson and Knight [2014] EWHC 3562 (Ch)

Summary

This High Court decision is the latest in a long line of recent decisions that illustrates that it is essential to comply with the pre-conditons if tenants wish to exercise a break option.

In this case, the tenants had negotiated a break option to be exercised if the local planning authority objected to their use of the premises. The break right was important to the tenants, who did not want to remain liable for the property if they could not use it for their business. The break option had pre-conditions with which the tenant needed to comply to exercise it.

However, when the tenants tried to terminate the lease, the High Court found that they had failed to satisfy the break conditions because a perimeter fence had been left in disrepair. The fact that the repair was seemingly minor in light of the ongoing liabilities under the lease demonstrates the importance of seeking early advice when trying to exercise a break option.

The facts

Mr Henderson and Miss Knight ("the Tenants") ran a second hand car dealership in Pontllanfraith known as "Dan's Bangers". The Tenants had first rented the property in 1999 from Sirhowy Investments Limited ("the Landlord "). At the time the lease was granted, the Landlord applied to the Local Planning Authority ("the LPA") for planning consent. The LPA duly granted permission to be used for the sale of cars, on the condition that a scheme for turning facilities for car transporter vehicles was to be agreed with the LPA.

The Landlord and the Tenants subsequently entered into a new lease for a term of ten years from 1 February 2005. The property included a workshop and an area of open land that was mostly surrounded by fencing.

As part of the negotiations for the new lease, the Tenants insisted upon a break right. The break clause that was agreed provided that, if the LPA objected to the permitted use of the premises for the sale of second hand cars, then the Tenants had to use "all reasonable endeavours" to obtain planning consent. If the Tenants did not manage to obtain planning consent, then they had an option to terminate the lease upon giving three months' notice to the Landlord.

Critically, the clause then went on to add two further pre-conditions: in order for the lease to terminate, by the time the notice expired, the Tenants were required to have paid the rent and "observed and performed the covenants" in the lease.

Throughout the course of their occupation, the Tenants had used an area of scrubland which lay outside their demise as a turning area. But shortly after the commencement of the new lease, this land was put to alternative use. The Tenants therefore had to unload stock on the public road.

The LPA was not satisfied with this, and on 18 August 2008, served a breach of planning notice on the Tenants. It required the Tenants to construct a turning area at the property and to cease using the property for the sale of cars until they had done so. The Tenants tried to resolve the issue, by looking at an alternative plot for the turning circle, and by preparing plans to construct a turning area, but none of the options were practically possible. On 30 March 2010 the LPA wrote to the Tenants to advise them that it intended to refer the matter to the Magistrate's Court.

On 9 April 2010, the Tenants served notice to terminate the lease. The Landlord disputed it on the grounds that the Tenants had not failed to obtain planning permission; they had simply failed to comply with the conditions of that permission. Consequently the Landlord argued that the Tenants were not entitled to terminate the lease. The Landlord also argued that the Tenants had failed to meet the pre-conditions of the break option as they were in breach of the terms of the lease.

The issues

The Court was asked to consider three questions:

  1. Did the LPA object to the use of the premises within the meaning of the break clause?  
  2. If so, had the Tenants used all reasonable endeavours to obtain planning consent for the permitted use of selling second hand cars within the meaning of the break clause?  
  3. If so, had the Tenants met the condition to pay the rent and observe and perform the covenants contained in the lease?

The decision

The Court found in favour of the Landlord for the following reasons.

First, it found that the LPA had objected to the use of the premises for the permitted use under the lease. The Tenants had been required to stop selling second hand vehicles from the premises, and so the LPA had objected to the use specified in the lease.

Secondly, the Court held that the Tenants had taken sufficient steps to try and resolve the planning problem. The judge considered that the key question was whether the requirement to use "all reasonable endeavours" meant that the Tenants had to be willing to consider building the turning area on the demised premises. The Tenants had duly considered this, but if they had done so, a significant part of the usefulness of the land would have been lost. Nothing in the lease required the Tenants to provide a turning area.

The Tenants having succeeded on the first two points, the Court then turned to the third question, that of whether the Tenants had complied with the pre-conditions to exercise the break clause. The Landlord had alleged a number of breaches, including a claim that the Tenants were keeping livestock by virtue of having a dog; that they had permitted employees to park in a prohibited area; that they had erected a workshop without complying with the conditions in the lease about planning; and that they were in breach of the decorating and repairing covenants.

Unfortunately for the Tenants, whilst the Court found that most of the Landlord's allegations were not breaches, they fell at the final hurdle because they had not complied with the obligation to keep the premises in "good and substantial repair". When the break notice expired, the perimeter fence of the premises had been patched in two places with sheeting. The Court agreed with the Landlord that this was not sufficient and thus the Tenants had failed to comply with the repairing covenant.

Our advice for landlords

If a tenant tries to exercise a break option, it will be necessary to consider carefully the landlord's commercial requirements and whether it is happy to take the property back. This will affect how it deals with the tenant. If the landlord wishes to take the property back, it may wish to enter into negotiations; however, if the landlord does not wish the lease to come to an end, then it will not wish to weaken its position inadvertently.

Early legal advice should therefore be sought, both on the break option and any pre-conditions, and on the validity of the break notice served by the tenant.

Our advice for tenants

At first glance the result might seem draconian, but the break clause here required absolute compliance with the terms of the lease. When negotiating a break clause, it is therefore vital to consider the impact of any conditions. The commercial benefit of including a tenant's break right as part of the bargain is lessened drastically where there are onerous conditions attached.

If the covenants in the lease must be performed in order to exercise the break, then the Courts have repeatedly shown that strict compliance with the terms of the lease will be necessary. In this case, the Court acknowledged that the Tenants had not merely kept the majority of the premises in repair, but had even improved them. However, this did not negate the obligation to keep the fence in repair.

We recommend that expert advice is sought early when tenants are thinking about exercising a break right. Depending on the pre-conditions, this may involve instructing a surveyor to advise on repairing obligations. Early advice can help the tenant to gauge the likelihood of the landlord contesting the break and the grounds on which it may do so, and provide options for minimising a challenge.

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