Breaking a commercial lease early

24th February 2011
Some leases will contain a right for the tenant part of the way through the lease to finish the lease or exercise a right to “break the lease”.  In the current economic climate tenants often want to take this opportunity.  Conversely Landlords will often do their upmost to keep tenants on the hook by arguing their attempt to break the lease has failed. 
Lots of things can go wrong in the exercise of break rights so we do always advise tenants and landlords to seek legal advice to make sure that the break has been exercised correctly.  In a 2010 case of Standard Life Investment Property Holdings Limited v W & J Linney the landlord had changed and even though the tenant paid its rent to the new landlord the break notice was served on the wrong landlord which meant the court decided the lease continued.
A tenant exercising a break right needs to make sure it has selected the right date and also given sufficient notice.  It is vital a tenant takes advice on the correct date and makes a note of the date that notice must be served by as soon as the lease is entered into.  Some break rights contain conditions the tenant has to comply with before he successfully exercises the break.  Examples of conditions are making sure the rent is paid up to date, not breaching covenants and handing over the premises with no-one in.
A further hurdle in most leases is checking how and on whom the notice has to be served.  In the 2009 case of Orchard (Developments) Holdings Plc v Reuters Limited the tenant served its notice personally on the wrong address and by fax.  The lease required the notice to be sent by registered post or served personally, as neither had been done the break was ineffective.
In the 2010 case of Hot Group Plc v Royal Bank of Scotland Plc it was a requirement that the break notice was served upon the landlord and also the managing trustee of the landlord’s trust.  The notice was served on the landlord but no notice was served on the managing trustee until after the break notice had been served.  The court decided for this reason the notice was invalid.
As well as remembering to serve the notice on the correct landlord the tenant has to make sure that the right tenant company serves the right notice.  In the 2010 case of Hexstone Holdings Limited and AHC Westlink Limited the tenant had allegedly merged with Eddie Stobart Group of companies and was to change its name to Eddie Stobart Limited, however at the time the break notice was served this had not happened but the break notice was served by the tenant using Eddie Stobart notepaper and was expressed to be given for and on behalf of Eddie Stobart Limited.  The judge agreed with the landlord that the notice as invalid.
In short, break notices are a minefield and for the sake of a relatively modest fee it is usually worth taking some legal advice to make sure the notice is exercised correctly.
Sarah Popp,
Commercial Property Partner