Serving break notices: how to avoid the pitfalls

The current economic climate has considerably impacted the commercial property market. While landlords are keen to ensure their income is protected, tenants increasingly rely on break clauses to bring leases to an early end - resulting in a rise in disputes and litigation.

Despite being extremely common, break clauses can be complex, and it is best to seek legal advice to avoid the pitfalls associated with failing to exercise the option correctly. 

In this article, Michael Mulcare, consultant litigation solicitor at SO Legal, looks at break clauses and some of the key factors landlords and tenants should consider before serving one.

Why use a break clause? 

There are many reasons either party might wish to exercise a break clause, including, for example, a landlord wanting an option to end the lease early to allow them to develop the property. 

A properly drafted break clause gives tenants a chance to escape from a lease they can no longer afford, providing an invaluable safety net, especially if they are starting their business or faced with an adverse economic climate. 

However, a landlord receiving a steady rental income from the property may be reluctant to lose that tenant, especially in a recession, making life difficult when they try to exercise the break option. 

To promote fairness, the Code for Leasing Business Premises in England and Wales 2007 recommends that breaks are made subject to fair conditions, but this code is not always followed. 

Initial points to consider before exercising the break option 

• The break option can only be exercised by the parties who own the relevant legal estates. Any party serving the break notice must ensure they have correctly identified the receiving party.  
   
• There must be a contractual right in the lease to terminate it before the expiry date. This can either be a tenant break right, a landlord break right, or a mutual break right. 
   
• If the landlord has a break right and the lease is a "protected tenancy" for the purposes of the Landlord and Tenant Act 1954, they will also need to consider serving statutory notices to terminate. 
   
• What is the break date, and how much notice must be given when exercised? Is time of the essence? These terms should be found within the lease. 
   
• What conditions need to be met to exercise the break validly? For example, some break clauses require that the tenant is up to date with the rent payment and for there to be no breaches of any tenant covenants. If the conditions are not complied with, the break notice will be invalid, and the lease will continue for the remainder of the term. 
   
• Once a break notice has been served, it cannot be withdrawn. Any mutual agreement to a break notice being withdrawn is considered to be a surrender of the original lease and the creation of a new lease on identical terms. 

The notice 

The break clause is contractual, so when drafting the break notice, it is necessary to carefully examine the lease terms to ensure that it is in the required format with the required content. 

Although there is a principle that a minor error in a break notice may not necessarily be fatal, it depends upon whether the error affects the understanding of the 'reasonable recipient' of that notice. 

For example, where the break date was incorrectly stated in the notice by one day, the court held that the notice was still valid. However, a contractual or statutory provision cannot be overridden by this principle, so if a clause were to state that the break notice must be printed on, say, A3 paper, but when served, it is on A4 paper, it will be invalid. Further, if the statute or the break clause clearly states that a non-compliant notice will be invalid, this will be conclusive. 

Service 

You will need to comply with the break notice's service requirements to avoid any challenges to its validity. These should be found in the lease within the break clause or in a general 'notices' clause but tend to include: 

• How the break notice is to be served. Usually, break notices must be in writing and sent to the recipient by a specific method, such as special or recorded delivery. An email will not be sufficient.  
   
• Where the break notice is to be sent, often being the recipient's last known place of business or registered office. 
   
• How much notice must be given. For example, the break notice may only be effective if given a certain number of months before the break date. The notice period should take into account the time required to ensure that the notice is "deemed served" on the recipient. 
   
• An agent can serve a break notice on behalf of their client, but the agent's authority must be made expressly clear in the notice itself. Of course, the agent must have the authority to serve the notice at the time of service.  

Practically, it is advisable to: 

1. Serve the break notice by a number of methods, such as by fax (if still used) and special or recorded delivery, so you have evidence that the recipient received it. 
    
2. If serving notice in person on a party in a building with several occupiers, the break notice should be served at the party's specific part of the building rather than being left at a reception with staff who may not even be the recipients. 
    
3. If personal service is required, use a process server and ensure that you instruct them to ask the recipient to confirm their identity and countersign a copy of the break notice.  
    
4. If there has been a recent lease assignment, serve notice on both the assignor and the assignee. 

Conclusion 

Break notices are beneficial to both parties and should be carefully considered when negotiating the terms of a commercial lease. If they are to be exercised, considerable thought needs to be given to the content of the break notice itself, how it is served and the implications of exercising the option. 

Legal advice should be taken to ensure that any break notice is valid to avoid issues later on and the risk of legal costs. 

Contact our solicitors for break notice advice

If you have any questions concerning break notices, our team is on hand to offer specialist legal advice on the correct procedures to follow.

Our property litigation solicitors provide professional, practical advice to landlords and tenants.

We have solicitors in London, Brighton, Eastbourne, Hastings, Uckfield, and Ulverston, and we work with landlords and tenants across the UK.