In these harsh economic times, all businesses need to review and reduce their cost base where possible. Many tenants are seeking to exercise break clauses to bring an early end to leases of premises that are no longer required or are too expensive for their needs.

Rental obligations under many commercial leases are substantial. One would expect tenants and their advisers to take great care to ensure that notices exercising break clauses are valid. However, the threat of breaking a lease is often used as a negotiating tactic and many decisions as to whether to exercise a break clause are left to the very last moment.

Many tenants appear to assume that simple errors in notices will not make the notices misleading to the reasonable recipient and so the notice will be valid, (relying on the principles set out by the House of Lords in the case of Mannai Investment v Eagle Star [1997] 3 All ER 352).

A survey of High Court cases over the last 18 months indicates that errors in notices are still being made and landlords are increasingly vigilant in challenging defective notices. The courts are also adopting a tougher approach to these errors and the numbers saved by the Mannai principles are declining.

Tenants have to remember that all options including break clauses will be construed strictly and time limits will be treated as being of the essence.

A few examples bear out this trend:

  • where a break clause required a copy of the notice to be served on the company managing the property, failure to serve this notice in time meant that the break was not exercised, even though notice had been validly served on the landlord (Hotgroup v RBS [2010] EWHC 1241);
  • where a notice was served by and in the name of another group company, the tenant could not show that it had exercised the break clause (Hextone Holdings v AHC [2010] EWHC 1280);
  • a notice in the name of one of two joint tenants was invalid even though the two companies were part of the same group (Prudential Assurance v Exel [2009] EWHC 1350)

Tenants who wish to exercise break clauses need to rigorously examine the terms of their leases, looking at notice and service provisions as well as the break clauses themselves. In-house counsel in particular need to check which group company the lease is vested in, before serving notices.

Remember, you may only get one chance to serve a valid notice as errors cannot be corrected once the window for exercising the break clause has closed (Orchard (Developments) v Reuters [2009] 1 EGLR 13).

This article is an extract from a presentation given by the author to in-house counsel and solicitors in private practice for the Central Law Training (CLT) in September 2010.