Business Law: Relocating? Take care over break clauses, warns Ian Barnard of solicitors Ashton KCJ

IN THE continuing tough economic climate, businesses are looking to cut back on costs, and for most, the largest expense is property rent.

If businesses are looking to re-locate or close down a surplus property, commercial tenants who are lucky enough to have a break clause within their lease can generally serve notice on their Landlord to bring the lease (and its liabilities), to an end on a specific future date.

There are normally a number of conditions to satisfy to effectively exercise a break clause, and these include making sure that the correct amount of notice has been given, all rent due under the lease is paid up to date, vacant possession of the property is given on the break date itself and that the terms of the lease have been complied with.

In determining whether the conditions have been satisfied, the courts have taken a very specific approach to compliance, meaning that all tenants need to be particularly careful and diligent to ensure that any break notice is valid, otherwise there is the danger that the lease and all of its liabilities will continue.

This has been reinforced in the recently decided case of Avocet Industrial Estates LLP v Merol Ltd, where the court held that because the tenant had not paid interest on their late rent payments, as required by the lease, then under the terms of the break clause, they had not paid all rents due under the lease and therefore the break notice was not valid. This meant that the tenant had to continue to pay rent until the end of the lease, which amounted to a liability of more than �300,000. The amount of interest that was outstanding was a mere �130.

The courts have been equally harsh in deciding what constitutes vacant possession of the property on the break date, with tenant’s items remaining in the property or the tenant returning to the property to carry out repairs required by the lease - both being held that vacant possession was not given and so the break notices were invalid.

It is therefore essential that any tenants who are considering serving a break notice under their lease double-check the terms of their lease to see what the requirements are to validly serve the break notice. Given the potential costs implications for non-compliance, it is strongly recommended that legal advice should be obtained well in advance of exercising any break clause so there is an opportunity to deal with any outstanding issues.

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This article is for general information purposes only and does not constitute legal or other professional advice. We would advise you to seek professional advice before acting on this information.