Break clauses in commercial leases - St John's Chambers

N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

Break clauses in commercial leases

Charles Auld, St John’s Chambers

Published on 18 March 2014

I. Introduction
1. It is not unusual for fixed term commercial leases to contain a clause (‘a break

clause’) which entitles one or other party unilaterally to bring that lease to an
end prematurely. However, the Courts have always considered break clauses
to be analogous to options to renew and options to purchase. Such clauses
are always construed very strictly; furthermore, as we shall see, if (as is
usually the case) the break clause is subject to the fulfilment of conditions,
the Court will usually treat those as conditions precedent which must be
strictly complied with.

2. The typical break clause will contain some or all of the following conditions:

a) Service of written notice by a given date, often six to nine months before
the break date;

b) Payment of a ‘break premium’, often included instead of compliance with
all tenants covenants;
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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

c) Vacant possession;

d) Compliance with the covenants in the lease both at the time that the
notice is given and also on determination of the lease.

As will be seen, some of these can contain traps, particularly for the tenant, which
can make the operation of the break clause almost impossible.

II. Miscellaneous
3. There are two miscellaneous points to note:

a) If the lease contains a break clause, but is silent as to who can exercise
that clause, it is the tenant alone who can exercise it;

b) Where a lease is granted to two joint lessees, then (in the absence of
anything to the contrary in the lease) any break clause can only be
exercised by the tenants jointly – see Hounslow London Borough
Council v. Pilling [1993] 2 EGLR 59.

III. Practical Difficulties with Exercising Break Clauses
4. An unconditional break clause is most unusual and normally it can only be

operated if the person seeking to break the lease has complied with the
requisite conditions. As the Court will construe as conditions precedent. A
failure to meet those conditions precedent will mean that the break clause

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

cannot be operated. Perhaps the best way to illustrate some of the
difficulties that can arise is to look at some fairly recent cases.

Vacant Possession
5. Ibrent Estates BV v NYK Logistics [2011] EWCA Civ 683

 The defendant held a warehouse under a lease which contained a break
clause. Exercising the break option was conditional upon the lessees
giving vacant possession by the specified date. The lessees served a valid
notice exercising the break option, but wanted to deal with the
dilapidations themselves before giving up possession.

 The schedule of terminal dilapidations was not agreed until two days
before the date by which the lessees were required to vacate. They
proposed an extension of time, but the landlords did not respond. The
result was that, on the date when the lease would have come to an end if
the break option were exercised, the lessees still were employing a
security guard on the premises had a small quantity of equipment there
and had their contractors on the premises to complete the repairs.

 The judge in the county court found as a fact that the presence of a
security guard and possessions did not prevent the tenant delivering up
vacant possession, but the presence of the contractors meant that the
lessees were still in possession and accordingly the lessees were liable for
rent until the next break option in the lease.

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

 The Court of Appeal upheld the judge's decision. It agreed that vacant
possession had not been given, and also that the landlords had not
waived the breach. It pointed out that, for there to be a waiver, the
landlords would have had to have elected between two inconsistent
rights; ie to elect between asserting that vacant possession had not been
given, or alternatively to accept that the lease had not been terminated,
and this had not been the case here.

 The lessees' proposal for an extension of time to deal with the schedule
of terminal dilapidations was a sensible suggestion, but, when it was not
accepted by the landlords, the lessees ought to have vacated the
premises, and requested permission to re-enter as licensees to complete
the repair work.

The Correct Tenant?
6. Hextone Holdings Ltd v AHC Westlink Ltd [2010] EWHC 1280 per Edward

Bartley-Jones QC sitting as a deputy high court judge
 The lease contained a tenant's break clause which entitled the tenant to

determine the lease on a given date by not less than six months' notice in
writing.

 The tenant under the lease, AHC, was a company within a group of
companies.

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

 In the course of the term, but before the break notice had been served, AHC
sent the landlord a document which indicated that AHC was about to
change its name to ESL and requested that any future invoices and
statements be addressed to ESL.

 However, there was a company called ESL already existence and it formed
part of the same group of companies as AHC, an in fact AHC did not change
its name to ESL.

 The break notice sent to the landlord ‚for and on behalf of ESL‛ and the
company registration number which appeared at the bottom of the page
was that of ESL, rather than AHC.

 The landlord sought a declaration from the court that the lease was
continuing notwithstanding the purported exercise of the break clause.

 It was held that break notice could not sensibly be regarded as having been
given by anyone other than ESL, and the principle in Mannai Investment
Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 (the reasonable
recipient test) does not apply in this case because it was one of the formal
requirements of the break clause that it should be given by the tenant.

 It was also held that the break notice could not be saved by means of
subsequent ratification (cf. Divall v Harrison [1992] 2 EGLR 64); ratification

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

of a break notice cannot save the validity of a break notice where it was
initially given be the wrong ‘person’ since a notice is either valid or invalid
and subsequent acts will not save it.

Rent
7. Avocet Industrial Estates Ltd v Merol Ltd [2011] EWHC 3422 per Morgan J

 A ten-year lease of a factory on the outskirts of Stroud, Gloucestershire.
The tenant had served its notice in time, but the elaborate break
provisions contained the usual stipulations that, in order to exercise the
break, the tenant had to have fully complied with its obligations under
the lease.

 Clause 14 provided that :
"14.1 If any Annual Rent or any other money payable under this Lease
has not been paid by the date it is due, whether it has been formally
demanded or not, the Tenant shall pay the Landlord interest at the
Default Interest Rate (both before and after any judgment) on that
amount for the period from the due date to and including the date of
payment.
14.2 If the Landlord does not demand or accept any Annual Rent or
other money due or tendered under this Lease because the Landlord
reasonably believes that the Tenant is in breach of any of the tenant
covenants in this Lease, then the Tenant shall, when that amount is
accepted by the Landlord, also pay interest at the Interest Rate on the

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

amount for the period from the date the amount (or each part of it)
became due until the date it is accepted by the Landlord."

 Clause 45 contained the tenant’s break clause, and provided that under
that provision time was of the essence. It allowed the tenant to give a
notice not less than three months before the Break Date to terminate the
lease on the Break Date. It was a very detailed provision and laid down a
number of particular requirements as to the validity of a break notice and
as to service of such a notice. In particular, clause 45.4 stated that the
Break Notice should be of no effect in certain specified circumstances:
"45.4 A Break Notice shall be of no effect if:
…
45.4.4 at the Break Date any payment under this lease due to have been
paid on or before that date, has not been paid, or
45.4.5 …
45.4.6 at the Break Date there is a subsisting material breach of any of
the tenant covenants of this lease relating to the state of repair and
condition of the Property, or
45.4.7 at the Break Date the Tenant has not paid to the Landlord a sum
equal to 6 months Annual Rent"

 Objection 1: the lease made no specific provision for the mode of
payment of rent otherwise than that payment was to be by standing
order if the landlord so required. The tenant had in the first 2 ½ years of

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

the lease paid by cheque, later using BACS payments, but reverted to a
payment by cheque for what it had thought was the payment due with
the break notice. The landlord argued unsuccessfully that it had required
payment by standing order. The landlord also failed to establish that,
failing payment by standing order, it could insist on payment in legal
tender. The landlord's challenge to the break notice on this ground
therefore failed.

 Objection 2: At the date of the service of the break notice, the tenant had
failed to pay default interest on various late payments of rent, insurance
rent, service charges, etc. Although the landlord had on occasions
invoiced the tenant for these, on other occasions it had not, and the
court held that the default interest was legally due even though it had
not been demanded. A further argument by the tenant based on
estoppel failed.

 On the facts of the case Morgan J held:
(1) through the course of the parties dealings the landlord had agreed to
accept cheques in payment of sums due under the lease;
(2) a demand for default interest was not necessary to show that it was
due and owing;
(3) there was no positive statement on the part of the landlord which
would give rise to an estoppel by representation;
(4) the landlord’s failure to tell the tenant that default interest was due
and owing did not raise an estoppel by acquiescence;
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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

8. PCE Investors Ltd v Cancer Research UK [2012] EWHC 884 per Peter Smith J
 The lease related to a floor of a property on Lower Regents Street,
demised by Cancer Research to STA Holdings, who during the assigned
the residue of the term to PCE Investors. The rent reserved by the lease
was £190,000 per annum payable in equal quarterly payments on the
usual quarter days.

 The break clause provided that :
‚The Tenant may determine this Underlease on the expiration of the fifth
year of the term ("the Termination Date") by satisfying the following
conditions:
The Tenant must have served not less than 6 months prior written notice
to determine on the Landlord; and
The Tenant must have paid the rents reserved and demanded by this
Lease up to the Termination Date; and
The Tenant must have given to the Landlord full vacant possession of the
Premises
AND provided such conditions are satisfied the Underlease shall cease and
come to an end at 12 noon on the Termination Date but that termination
shall not affect any claim by either party against the other for breaches of
obligations under this Underlease.‛

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

 The tenant served notice to exercise the break option, expiring on 11
October 2010. On 24 September 2010 instead of paying a full quarter’s
rent it paid rent on a daily basis from 29 September 2010 to 12 October
2010. The email under which the payment was confirmed requested the
landlords agent to ‚please confirm that this is the correct basis for
calculating the liability for the short period.‛ The landlord did not
respond.

 By a letter dated 2 November 2010 the landlord’s solicitors wrote to the
tenant demanding payment of the balance of the rent and contended
that the break clause had not been validly exercised.

 Peter Smith J held that on a straightforward construction of the
underlease, all obligations subsisted until its actual termination. That
included obligations relating to future rent:

‚By clause 3 of the Underlease the Property are demised for the term
subject to the yearly rent of £190,000 "payable by equal quarterly
payments in advance on the usual quarter day in every year the first such
payment to be made on the rent Commencement Date and to be in
respect of the period from and including the Rent Commencement Date
until the next following quarter day".
Covenant 4.1 obligates the Tenant to pay the yearly rent as reserved
therein.

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

Thus the rent is a yearly rent but the Tenant is given a concession in that it
is not required to pay the year's rent in full at the commencement of the
year but has the grace of paying the rent quarterly over that year.
Under clause 11.2 the Tenant is obligated "[to] have paid rents reserved
and demanded by this Underlease up to the Termination Date and by the
Termination Date".
On 29th September 2010 whilst the Underlease was still subsisting an
obligation fell to pay the next quarter of the annual rent. Obviously that
extended to the period ending on 25th December 2010 but the
obligation subsisted at the time that the rent fell due on 29th September
2010. That is an obligation that is reserved under clause 11.2 and is due
on that date. On that date of course it cannot be said with certainty that
the Underlease will terminate on 11th October 2010. The Tenant might
be in breach of some other provision. That can only be determined after
the event and I cannot see that it is right as a matter of construction that
the clear obligation on 29th September 2010 to pay a full quarter's rent
can somehow be retrospectively reduced merely because an event after
that date operates to terminate the Underlease from that future date. It is
true that the obligation is to pay the rents up to the Termination Date but
that does not in my view assist the Tenant. A quarter's rent fell due on
29th September 2010. I do not accept that those words make it
unnecessary if the intention was that rents related to a period after the
Termination Date needed to be paid.

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

Conversely it seems to me that the simple straightforward construction
namely that all obligations under the lease subsist until an actual
termination of it is anything other than a sensible business sense. A
Tenant knows precisely what it has to do. If for example the Tenant
tendered the short rent (as happened here) and for some reason the
Underlease did not terminate it would become under an obligation to
make up the shortfall and would on this analysis be retrospectively in
breach of the obligation to pay the full quarter on 29th September 2010.
That seems to me to be the type of uncertainty which a businessman
would find unsatisfactory.‛

9. Note that in Marks And Spencer Plc v Bnp Paribas Securities Services Trust
Company (Jersey) Ltd [2013] EWHC 1279 (Ch) in order to exercise a break
clause the tenant had to pay a year’s rent. Also, the rent was payable on
25th December 2011 for the quarter until 25th March 2012, but the break
clause determined the lease on 24th January 2012. The tenant duly paid the
full rent on the December 2011 quarter day, but, after the lease had
determined in accordance with the break notice, the tenant demanded back
the payment for the period after 24th January 2012. Morgan J was prepared
to imply a term that the overpayment should be repaid to the tenant.
However, this decision may be fact specific. As Morgan J said at [35]:
‚I also consider it to be relevant that the break clause may only be effectively
operated where the lessee pays to the lessor a sum equivalent to one year's
rent. That provision shows that the parties applied their minds to the

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

compensation which the lessor should receive for the fact that after the
break date the lessor would have vacant possession rather than an income
stream under a continuing lease. That fact makes it unlikely that the parties
would have intended that, in addition, the lessor would be entitled to retain
the full amount of the quarter's rent paid on the quarter day before the
break date.‛

10. Intergraph (UK) Ltd v Wolfson Microelectronics plc [2012] EWHC 528
 A lease of first-floor offices which included an option to determine the
lease on various dates (2006 lease). The option to determine was
conditional upon vacant possession and the lease provided that time was
of the essence. In 2008 the parties had entered into a new lease for
additional space on the same floor, with an identical break clause (2008
lease). In 2009 the tenant vacated both the premises demised under the
2006 lease and those demised under the 2008 lease, and then served a
break notice bringing the 2006 lease to an end in 2011, but by an
oversight neglected to serve a notice in respect of the 2008 lease.

 The landlord would not agree to accept a surrender of the 2008 lease, so
in order for the break clause under the 2006 lease to be valid, the tenant
had to reinstate the partition between the two units and a means of
independent access to the property let under the 2008 lease. The tenant
took steps to commence work, but just before this work started, the
landlord insisted upon approving in advance the plans for the

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

reinstatement works. This placed the tenant under a (impossibly) tight
timescale, so the parties reached various agreements whereby the
landlord would undertake this work, in return for a money payment by
the tenant to the landlord on or before the break date.

 Unfortunately the payment was not made in full in time, and the landlord
thereafter refused to accept late payment, arguing that the tenant had
not exercised the break clause in time and remained bound by the 2006
lease.

 Mr Richard Snowden QC, sitting as a Deputy Judge of the Chancery
Division, accepted the landlord's submissions. He held that the agreement
reached between the landlord and the tenant was not intended to give
an unqualified acceptance of the effectiveness of the break notice.
Instead, acceptance of it was dependent upon the conditions that
followed, including the payment of the agreed sum in full by the break
date.

11. HFI Farnborough LLP and others v Park Garage Group plc [2012] EWHC
3577
 Four leases entered into on various dates in 2006 and 2007. Each for a
term of 25 years. The premises were four petrol stations. The leases
contained a break clause, exercisable on three months' notice by the
landlord, but alongside the leases the parties had concluded overage

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

agreements restricting the exercise by the landlord of the break clause
and providing that, if the break clause was exercised, the landlord would
pay overage to the tenant so as.

 There were difficulties in registering the overage agreements at the Land
Registry, so deeds of variation were completed, expressly incorporating
the overage agreements into the leases.

 In 2011 the original landlord sold each of the four freehold reversions to
one of the four claimant LLPs.

 The restrictions on the exercise by the landlord of the break clauses
appeared to operate whenever the value of the reversion exceeded the
original price paid by the landlord. The claimants therefore purported to
exercise the break clause, relying on valuations to show that the condition
had been satisfied, and thus sought possession from the defendant.

 The issue between the parties was whether the break clauses could be
exercised as long as the value of each reversion exceeded the relevant
price, or whether the restrictions on the use of the break clause should be
construed as allowing the landlord to terminate each lease only in the
event of the landlord having contracted to sell the reversion.

 Sitting as a Deputy Judge of the Chancery Division, HHJ Behrens relied on

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

the principles of interpretation set out in cases such as Chartbrook Ltd v
Persimmon Homes Ltd which emphasised that an interpretation with
business common sense should, if possible, be preferred.

 He held that the deeds of variation should be interpreted so that the
break clause could be exercised only in the event of there being a sale,
and the price exceeding the original price, so as to link the break clause in
with the requirement that overage had to be paid.

Repairs
12. West Middlesex Golf Club Ltd v Ealing London Borough Council (1993) 68

P & CR 461
 The Golf Club leased land originally from the Greater London Council,

but this was transferred to the defendant when the GLC ceased to exist.
The Golf Club had an option to renew its lease which was exercisable
provided that the tenant had complied with the covenants in the lease.
These included keeping the hedges and fences around the course in good
and substantial repair;

 On 22nd January 1991 the Golf Club applied to renew the lease, but the
defendant objected that there were a number of breaches of covenant
including gaps in the boundary hedge and defective wire mesh fencing;

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

 The Golf Club remedied the matters and, on 18th June 1991 served a
fresh option notice. The defendant inspected on 24th June 1991 and
considered that the boundary hedges and fences did not comply with the
covenants and refused to renew the lease. The Golf Club contended that
the boundary hedges and fences had been in repair on 18th June 1991
and that if they were not in repair on 24th June 1991 that was probably
because of vandalism (which was admitted to be a problem);

 The Court declared that the option had been validly exercised. The judge
stated:
If the tenant has honestly performed and complied with his
covenants……he is not to be deprived of his right to renew if, for
example, some damage has been caused by wind or weather, or by some
vandal or trespasser at the last minute before the option is
exercised……which the tenant has not had a reasonable time to repair.
Glaziers and builders do not turn up instantly and miraculously the
moment damage occurs. A covenant to keep in good repair is not, as
both sides accept, an absolute warranty that the demised premises are at
every moment in time in good repair.

13. Bairstow Eves (Securities) Ltd v Ripley [1992] 2 EGLR 47
 The tenant had an option to renew if ‘…the tenant shall pay the rents
hereby reserved and perform and observe all the covenants and
obligations…’;

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

 The lease contained a covenants (1) to keep the premises in good and
substantial repair and (2) to paint the premises in the last year of the
term;

 The trial judge held that the ‚…premises were in a good state as regards
painting and decorating……I am satisfied that the technical breaches of
the covenant, in not actually doing the works in the last year of the
term……could not possibly have been such as to have given the
defendants a quantifiable claim in damages‛ and held that the option
had been validly exercised;

 The Court of Appeal allowed the appeal. Scott LJ said: ‚The judge held
that the condition precedent had been satisfied because clause 2(5) had
been complied with ‘in substance’……This was, in my judgment, a
misdirection. The clause 2(5) obligation was to paint and decorate in the
last year of the term. It was not complied with at all.‛

IV. Matters to keep in mind
14. It is vitally important that both landlords and tenants are aware of the conditions

attached to the right to exercise the break clause. An absolute condition,
such as the tenant shall pay the sums and rent up to the break date, will
prevent the tenant exercising the break clause if there is non-compliance (eg.
there are arrears, no matter how trivial or how they arise).

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

15. Qualified conditions, such as the tenant must ‚reasonably‛, ‚materially‛ or
‚substantially‛ comply with his obligations give the tenant far more scope
for compliance, but even then one cannot be certain that conditions have
been met.

16. If there is genuine doubt as to whether any money is owing to the landlord at
the break date, and the landlord refuses to confirm whether or not any
exists, it might be worthwhile making payment just in case. It seems it then
ought to be able to be recovered as an overpayment after the break clause
has been validly exercised.

17. The commonest mistakes to make in exercising break clauses include:
 missing the deadline for service of a break clause;

 the entity exercising the break clause is not the tenant within the
meaning of the lease, or the notice is served upon the wrong landlord;

 failing to pay the full rent due to the end of the quarter;

 failing to pay all sums due;

 failing to vacate;

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N.B. While every effort is made to ensure the accuracy of the information given in these notes,
they are not intended to be relied upon as legal advice and no liability will be accepted in relation to such reliance.

 relying upon non-binding without prejudice discussions relating to
conditions precedent to the exercise of the break clause;

18. When negotiating leases for tenants:
 attempt to agree unconditional break clauses in return for break
payments;

 try to avoid agreeing to comply with all tenants covenants under the lease
as a condition precedent to the exercise of the break clause, since these
can often be almost impossible to comply with;

 if the landlord will not agree to remove all break conditions, make sure
that compliance is both possible and measurable;

Charles Auld©
14th March 2014
[email protected]
St Johns Chambers

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