Like many other industries, in the Industrial and Engineering sector property assets often comprise one of the largest single overheads for the business. Unless the company owns its property, it will usually have to rent premises, sometimes at relatively short notice, and will wish to ensure that so far as possible, there is flexibility in the tenancy agreement so that the leasehold interest can be disposed of swiftly to accommodate changing business requirements. If a contract is lost then this will likely be a huge blow to the business – if it cannot then efficiently terminate its lease then this may well exacerbate the problem and can potentially force a company into insolvency.
In order to give such flexibility, commercial leases often contain break clauses enabling one or both of the parties to bring the tenancy to an end before its contractual expiry date. The right to exercise a break right may arise on one or more specified dates, or it may be exercised at any time during the term on a ‘rolling’ basis.
In this uncertain economic climate these type of clauses can afford tenants the flexibility that they require by providing an opportunity to restructure their property holdings and potentially make significant cost savings. However, it is common that pre-conditions must first be adhered to for the break to effectively determine the lease and in the case of tenant breaks, such conditions can often be particularly onerous. Unless the lease contains a ‘rolling’ break option, getting the exercise of the break wrong can have grave consequences for the business and may mean that the lease continues for many years in to the future.
Courts interpret break rights very strictly, so failure properly to adhere to any conditions is likely to mean that the break is ineffective and the lease will continue to operate in full force and effect.
Common conditions for the operation of the break include:
- The tenant must have paid all the rent due up to the break date;
- The tenant must have materially complied with all of its covenants;
- The tenant must give vacant possession of the property by the break date.
A Real Estate Litigation team led by partner James Batham assisted by associate Sarah Glanville and senior associate Philip Myers, have recently successfully settled a £multi-million claim against a tenant’s former legal advisors arising from the advisors’ failure to give full and correct advice to the tenant in relation to the conditions to be met to validly exercise a break clause in a lease of a substantial manufacturing plant.
The client’s lease contained a once and for all break right which, if successfully operated, would have brought the lease to an end in September 2009. The contractual term of the lease ran until 2016; therefore, the consequences of invalidly exercising the break are obvious – the lease continues to operate and the tenant remains liable for all of the outgoings, including rent, insurance, service charge, maintenance (etc), for a further 7 years.
In mid-2007, the tenant approached its then solicitors for advice on the lease and specifically what it would need to do in order validly to exercise the break clause. One of the conditions related to providing vacant possession of the premises. Unfortunately, and in spite of repeated enquiries by the tenant of its legal advisors, their solicitors failed to give any adequate advice on what was required in order to achieve vacant possession. In particular, the solicitors failed to take account of a power plant within the grounds of the demise, which needed to be carved out of the lease, or the fact that careful forward planning would be required in order to transfer the remainder of a manufacturing contract that the tenant had already committed to. As a consequence, the tenant was unable to provide vacant possession of the premises and so the break was ineffective and the lease continued to operate.
Naturally, once the tenant became aware of the reason why the break was ineffective and the fact that, with correct and timely advice, it would have put in place measures to ensure that the lease would have terminated on the September 2009 break date, it looked to its former advisors for recompense. The tenant duly instructed Eversheds’ Real Estate Litigation team to pursue a claim against its former solicitors.
Court proceedings were ultimately commenced in October 2011 and just 2 weeks before trial in February this year, the former solicitors’ insurers made a sensible offer of settlement, which the tenant accepted. Not only did the tenant recover the costs that it had incurred pursuant to the lease from the break date but it also received substantial compensation for the liabilities that it will now incur until the expiry of the lease. Additionally, Eversheds recovered a high proportion of the tenant’s legal costs.
Although this case resulted in a very successful outcome for the tenant, it remains a salient lesson for tenants carefully to review their leases and any conditions that might attach to a break clauses, take proper legal advice and carefully forward plan, so that if they do choose to exercise a break right, they will have sufficient time to ensure that the conditions can be met”.