Key considerations when exercising a break clause

11 March 2014

Following on from last week’s blog and checklist,  Break Clauses in Commercial Property, this blog summarises two of the key recent cases in this area, relating to the payment of sums due as well as highlighting some of the commercial aspects to bear in mind when a right to exercise a break clause in a lease is on the horizon.

There have been a number of recent cases relating to payments following the exercise of a break clause. Whilst the more recent case of Marks & Spencer plc (M&S) v BNP Paribas Securities Services Trust Company (Jersey) Ltd (BNP Paribas) has indicated that a tenant had an implied right to the refund of an overpayment, the area is fraught with danger and a professional review should be undertaken. Notwithstanding the case, the prudent advice would be to pay all relevant sums and argue after the event – which was effectively the approach taken by M&S. 

In the recent case of PCE Investors Limited -v- Cancer Research UK, the tenant served notice to exercise its break right.  The break clause contained conditions including an obligation to pay “the rents reserved and demanded by this Lease up to the Termination Date” which was during a quarter as opposed to at the end of the quarter.  The tenant paid up to and including the break date – effectively apportioning it.

The Judge held that the full quarter's rent accrued on the previous quarter day and was payable under the lease. The rent had to be paid to satisfy the condition in the break clause that the rent was paid "up to" the break date.  The Courts held in favour of the landlord and the lease was deemed to continue.  The case was appealed but the parties subsequently reached a settlement.

Prior to this, it had been accepted law that if the break was in the middle of the rent period, rents payable in advance were not recoverable by the tenant unless express provisions were included within the lease.  The Apportionment Act 1870 does not apply to such sums. 

However, in the more recent case of M & S v- BNP Paribas, the Court for the first time allowed a former tenant to recover advance rent paid before the lease was successfully broken.  In this case, the Courts implied a term entitling reimbursement.  Note that in this instance, M&S were required as part of the break to pay a reverse premium and a significant windfall would have arisen if BNP did not repay the rent.

This case is currently being appealed. The case is due to be heard in the Court of Appeal later this month. We will provide an update after this hearing.  However, as noted above, in the absence of an express provision in the lease allowing for repayment of post break rents, it is prudent to pay all sums demanded and then seek repayment after the break has been exercised.  M&S had paid the full quarter’s rent but sought a refund after termination thereby reducing any potential argument of non-compliance.

In light of these cases and the checklist of key stages, the tenant should consider its position well in advance of any potential break. 

Planning and alternatives

The tenant should take time to review the business case for moving and the cost of comparable premises in the market.  It may then decide that opening negotiations with the landlord may lead to improved terms e.g. the lease could be varied by removing the break and an additional rent free period could be negotiated.  There will be tactical considerations which will depend on the prevailing market conditions e.g. if the premises are in demand or under rented the landlord may actually want the premises back.

Once a break clause has been exercised it cannot be withdrawn.  The parties may mutually agree the withdrawal of a break clause but this creates a new lease on the expiry of the break notice.  If the tenant wants to negotiate a variation, they need to consider their position carefully. Equally, any re-negotiation of terms is unlikely to be agreed overnight as they inevitably have financial implications for the parties. The landlord may need to consult with its equity investors and/or lenders to obtain consent to any variation. A tenant should ensure that they factor in time to do this and take steps to protect their own interest whilst any negotiations are on-going.

For more information on break clauses or to assist with a review of your occupational requirements please contact one of the members of the Kingsley Napley Real Estate practice.

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