“I want to break free!” – exercising a tenant break right during the COVID-19 pandemic

The statutory protection from forfeiture afforded to commercial tenants, by virtue of section 82 of the Coronavirus Act 2020 (‘the Act’), is now well-known. Despite its limitations, there is clear evidence that tenants from across the country are utilising this protection in the event that they are unable to pay their rent during these uncertain times. In spite of this new layer of protection, and subject to the terms of individual leases, break clauses remain a practical option for tenants to break free from their leases entirely to help mitigate the impact of the COVID-19 pandemic.

Even in normal circumstances, great care must be taken by tenants when exercising a break clause. Careful attention needs to be paid to the provisions of the lease itself, and the specific conditions attached to the break clause that must be satisfied in order to effect the right to break. Such conditions must be adhered to strictly, with failure to comply resulting in a break right not having been validly exercised, with the tenant then being tied into the lease for perhaps many years to come.

The existing common pitfalls in successfully breaking a lease have, unfortunately, been exacerbated by circumstances surrounding the COVID-19 pandemic, which have made it practically more difficult to satisfy break clause conditions and therefore to exercise a break right. An increase in practical difficulty is not ordinarily enough to frustrate the provisions of a lease, and so such conditions must be complied with now even more diligently than ever before.

So, what are the pitfalls that tenants should be looking out for, and what actions could and should be taken?  

Notice to break

A break clause will commonly contain provisions that require the parties to serve notices upon each other indicating their desire to terminate - this is known as a ‘break notice.’ Tenants looking to terminate the lease by exercising their right to break, will need to review the provisions of the lease carefully to ascertain what procedure needs to be followed in order to serve a break notice on the landlord.

In conjunction with the break clause itself, attention should be given to the provisions of the lease, which deal with notices. This is where the detail can be found in respect of what form the notice should take, how it should be served, and upon whom it should be served. The provisions of the lease may require the notice to be in writing and exclude service by email or other means. Furthermore, it may oblige the tenant to serve the notice by first class post, and will commonly provide an exact address for the company or individual on whom the notice should be served. If any of these requirements are not strictly adhered to, then the notice will have no effect and the lease will not be broken.

Tenants may be forgiven for thinking that such requirements may be relaxed during the ongoing pandemic. However, the courts take a very strict approach to break clauses and the need to comply with what is set out in the lease remains as important as ever. Postal and courier services are still available; therefore, the Courts are unlikely to take a sympathetic approach to tenants who fail to abide by the notice provisions of a lease.

Tenants will be expected to adhere to the notice provisions set out in the lease in the same way they would have done prior to the pandemic. Although postal and courier services are still available, tenants should incorporate extra days into their timetable for service of the notice, so as to alleviate the possible risk posed by any postal or delivery delays. It would also be sensible for tenants to communicate the intention to break the lease with the landlord at an early stage so that they are aware in advance that notice to break will be served. 

Break clause conditions

Two conditions commonly found in a lease are that:

1. a tenant should be up to date with their payments; and
2. that either the property must be handed back to the landlord free of any existing underleases, third party rights and charges, or that the tenant must give ‘vacant possession.’

Payment of rent and other sums

As outlined in the introduction to this article, section 82 of the Act prevents landlords from taking any forfeiture action against any commercial tenant who withholds payment of rent from their landlord for a period of time - currently set as from and including 26 March 2020 to and including 30 June 2020.

The tenant should bear in mind that the purpose of section 82 is merely to provide protection from forfeiture. If the break clause in the lease contains a condition to pay rent up to the break date, then they must do so. It would not therefore be sensible for a tenant wanting to break their lease to rely on section 82, and instead, the tenant should ensure that all payments due under the lease are made up to date. The tenant should also be mindful to check the exact wording of the condition and the definitions of the lease to ascertain what payments are required to be made, with examples ranging from annual rent only to all sums payable under the lease.

During the current climate, rent concessions will also be considered by numerous landlords and tenants. If any such concessions have been agreed by the parties, then it would be prudent for tenants to have this legally documented. This may be accomplished by way of a side letter to the lease, or perhaps a deed of variation to the existing terms. It is advisable for tenants to seek the assistance of a property solicitor in doing so, as it is important that the documents are drafted correctly to ensure enforceability. Whatever has been agreed in terms of a rent concession should be taken into account when considering the condition on the tenant to have paid all payments up to date.

Vacant possession

The provisions of the break clause may include wording obliging the tenant to “give back the premises to the landlord free of the tenant’s occupation and the occupation of any other lawful occupier and without any continuing underleases,” or wording to that effect. The tenant would need to ensure that they are able to hand the property back to the landlord free of occupation and ensure that any underleases or third-party interests in the property have come to an end.

It would be sensible for the tenant to consider what action needs to be taken in order to terminate such interests. For example, deeds of surrender may need to be completed with any existing undertenants. Consideration should be given to the fact that the time needed to agree and complete such legal documentation is likely to be longer in light of current circumstances. Early action is advised.

Tenants could also face difficulties if the break clause specifically requires for ‘vacant possession’ to be given. The inclusion of vacant possession wording in a break clause is considered undesirable, since the court held in the case of NYK Logistics (UK) Ltd-v-Ibrend Estates BV that, in order for vacant possession to be delivered up:

1. no-one must be in the property;
2. the landlord must be able to take immediate and exclusive occupation and control of the property; and
3. the property must also be largely empty of chattels, meaning anything left in the property by the tenant should not interfere with the landlord’s possession of a substantial part of the property.

The difficulty here lies with the practicalities of complying with the last point above and ensuring that the property is empty. Depending on circumstances, chattels may include quite substantial items such as demountable partitioning and machinery.

Given the lockdown restrictions imposed by the UK Government, a tenant should evaluate at an early stage how they are going to comply with such a condition, and the obstacles that they face in doing so. Third party companies may need to be hired to remove fixtures and fittings from the property, the hiring of which could prove difficult. However, the government has announced that, from 13 May 2020, removal firms may operate, which should greatly assist tenants who need help in removing items from the property in order to comply with this condition.

If a tenant has concerns that they will not be able to satisfy a certain break condition due to the complications caused by COVID-19, then they may wish to consider taking some practical steps such as opening up a dialogue with the landlord surrounding the possibility of entering into a variation of the break conditions.

It may also be possible to agree a variation to the timeframe for serving the notice, or perhaps varying the break date itself, in order to allow the tenant to break the lease at a later date when the problems surrounding compliance with the conditions no longer exist.

Again, it would be prudent for tenants to seek professional assistance in doing so. However, many landlords will not wish to assist the tenant to break the lease.

Tenant check list 

• Consider at an early stage whether or not you wish to exercise an upcoming right to break.
• Either carefully read the terms of your lease, or instruct a commercial property solicitor to do this for you, in order to establish what work needs to be carried out to effect the break, and what timeframes need to be adhered to.
• Prepare by considering any conditions that need to be satisfied, and think practically about any problems that may arise in respect of satisfying the conditions due to the COVID-19 pandemic and how you will overcome these obstacles.
• Give yourself plenty of time to deal with any notice requirements in the lease to alleviate any risk caused by delays in the postal service.
• Where appropriate, open up a dialogue with your landlord regarding anything they can do to assist, for example varying the terms of the lease as discussed above, or discuss other ways to terminate your lease with the landlord such as a surrender.
• If any rent concessions or other arrangements are agreed with your landlord, ensure these are legally documented. It is advisable to instruct a commercial property solicitor in this respect to make sure the documents are legally enforceable.

Conclusion

It is evident that tenants wishing to exercise their right to break a lease face even more obstacles than they previously have. Early consideration and preparation surrounding the practicalities of breaking the lease is therefore key during this time.

The valid exercise of a break by a tenant has long been a hot topic, and one that is engulfed in debate and case law, owing to the fact that it is so easy to get wrong.

Tenants are strongly advised to seek the assistance of a legal professional when exercising their break, to ensure the lease is read carefully by an expert and the procedure followed correctly.

For further updates and other articles discussing the impact of the coronavirus please view our coronavirus hub.