Break Notices on retail leases: getting them right!
The ability for a retailer to terminate a lease by exercising a break option has always been a very important tool.
In the current economic climate the focus on break options in leases has never been more intense. For you as a retailer, the whole point of including a break option in a lease is to provide flexibility, and to enable you to break the lease and end your liabilities if the store is not trading profitably, or for other strategic reasons you wish to exit the lease. But life is never that simple – the landlord is rarely going to want you to leave for the obvious reason that he could potentially suffer a void and will lose rental income. If there is any scope to challenge a break notice, a landlord will generally do so.
It is vital that you seek proper advice and meet all of the various conditions set out in the break clause. Most break clauses will contain a list of conditions which must be complied with. The common conditions are:
- Pay rents and comply with all covenants: This is the most onerous type of break clause. It means that not only must you ensure that all rents are paid up to the date of expiry, but also that all other covenants in the lease are complied with. The most important of these covenants is going to be the repair and yield up covenant. You must therefore get advice from a building surveyor as to exactly what needs to be done to ensure that all works are carried out by the expiry date. If any works are not done, the break notice is open to challenge.
- Pay rents and ‘materially’ comply with all covenants: This type of clause is the next best option because it means that if there are minor items of disrepair outstanding then these should not invalidate the break notice. Nevertheless, you should err on the side of caution and, as above, endeavour to carry out all repair works which might be recommended by a building surveyor.
- Payment of rents due and demanded: In this type of clause there is no requirement to carry out any reinstatement works to the premises – you will simply be required to pay all rents and other sums which have been demanded. If you do not carry out any works, you do of course remain liable to the landlord for the cost of carrying out those works. Whilst this option is preferable, you must nevertheless be alert and ensure that all rents and service charges and any other sums demanded by the landlord are paid up date.
Other issues which need to be addressed by an exiting retailer include:
- Does the clause require you to give vacant possession? The term 'vacant possession’ has a specific legal meaning. You should take advice on exactly what is required.
- Does the clause require you to pay interest on unpaid rents? If so, the onus is on you to check all payments made historically under the lease and if any were late, interest will be due and must be paid to the landlord prior to lease expiry.
- If the break option is personal to a particular tenant, can the notice be validly served?
- If there has been an inter group assignment, does the new tenant have the right to serve the notice?
- Is the notice being served upon the correct landlord?
- Is the notice properly served under the terms of the lease?
- Does the notice specify the correct expiry date under the lease?
In summary, the area of preparation and service of break notices is something of a legal minefield at the current time. It is advisable to seek professional advice, not only in relation the service of the notice, but also in relation to the various other conditions that need to be satisfied and the work which you may need to do in order to get your house in order before the expiry of the term. If the break notice is successfully challenged by the landlord then the potential consequences can be extremely serious from a financial viewpoint and, indeed, in relation to your business as a whole.