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Commercial lease break options need careful examination

Thursday 29 May 2008

As with any commercial property transaction, the best advice is to seek advice from your solicitor. Just one example of the many issues that can arise relates to ‘break options’, which are arising more frequently in commercial leases. As the recent case of Legal & General Assurance Society Limited v Expeditors International (UK) Limited (2006) demonstrates, it is advisable for both parties to a commercial lease to ensure that the wording of any break clause contained in the lease is not only carefully considered at the point of drafting the lease, but also is re-examined closely when it comes to exercising the break.

In this case, the break clause entitled the tenant to terminate the lease on six months prior written notice provided certain conditions were complied with, which included returning the property to the landlord with vacant possession. This required, amongst other things, the property to be cleared of the tenant’s belongings and personnel. The tenant served a break notice on the landlord and there then followed some discussions about the tenant’s repairing and decorating liability under the lease. Eventually, a deal was struck whereby, in return for a payment, the landlord would release the tenant from all liabilities, past and present, under the lease.

Later, the landlord made a claim against the tenant for arrears of rent and service charges. It argued that the tenant’s exercise of the break option was not effective as the tenant had failed to return the property with vacant possession; the tenant had left a large number of unwanted items inside the property, its staff were still clearing the site after the notice period had expired and it had failed to return the keys to the landlord. The tenant, in turn, argued that a deal had been struck and the landlord could not claim against it.

The Court agreed with the tenant, stating that it was implied into the terms of the settlement agreement that the break notice was to take effect and that the landlord was unable to rely on a failure of strict compliance with the provisions of the break clause to defeat the notice.
It is therefore important, for both tenants hoping to implement a break option or for landlords receiving such a notice, to seek timely legal advice as to how best to deal with it.
 

Matthew Rodgers is a specialist commercial property lawyer at Bell & Buxton Solicitors.