In the wake of the COVID-19 pandemic, many businesses will no doubt be reassessing what premises they need to keep operating from and whether they can get out of any leases early. Exercising a break option will therefore be an increasingly attractive option for tenants needing to downsize. It can likewise be a good route for landlords to replace a struggling tenant with another with a stronger covenant, if a mutual or landlord break option exists.
The consequence of a break notice, being early termination of a lease, makes it essential to get it right. Here are ten top tips to consider before serving a break notice, or in reviewing its validity:
- Know your deadlines. At the start of a lease, make sure you note any deadlines and notice periods for serving a break notice. It could be a one-time option, so have reminders in place to consider the break early and ensure the option won't be missed if it is needed.
- Bring all payments up to date. Any rent or other sums due in advance under the lease should all be paid on time before a break option is exercised. That means even if a break date falls within a quarter, a tenant should pay rent to cover period beyond break date if it is payable in advance.
- Don't assume any overpaid rent will be refundable. If payments in advance do have to be made in line with the lease terms before a break option is exercised, that doesn't automatically mean a tenant will be entitled to recover rent for the period beyond the break date. Whether the lease allows that will be a matter for contractual interpretation, but the courts have previously refused to imply a term into a lease that a tenant would be entitled to such a refund.
- Consider dilapidations. Early termination of a lease will likely bring with it a dilapidations liability. Tenants should consider in advance what needs to be done to return the premises to the landlord in lease compliant condition. Landlords should equally consider whether they have to give notice to a tenant in advance of lease termination in relation to reinstatement of tenant alterations.
- Check the break clause, and check it again. Break notices require strict compliance with the break clause. If anything has to be done before a break is exercised, for example, payment of a premium for early termination, make sure it is done before the notice is served. Otherwise, the notice could be invalid.
- Comply with the lease notice clause. Most commercial leases will contain a stand alone notice clause. This may specify exactly how, and sometimes where, notices are to be served. If the lease requires service by a certain method, for example by first class recorded delivery, make sure that is followed.
- Don't wait until the last minute. If the notice clause requires service by post, it may state that the notice will be deemed served after a certain number of days. That time should be factored into any notice periods. If the notice has to be sent abroad, leave extra time to ensure the delivery can be made on time.
- Consider other methods of service. If the notice clause doesn't specify a mandatory method of service and only requires notice 'in writing' to be given, that could include email, as considered in our previous blog here. If last minute service is required, sheriff officers can also be instructed to serve by hand.
- Serve it on the right party. A seemingly obvious point but one that nonetheless is arguably the most important one. A notice to a landlord (or a tenant) should be just that – it will not be enough to have served notice on their agent (unless they have authority to receive such notices, or have held themselves out as having such authority). Make sure you have the right name and address for the party you are serving notice on, and that the notice is correctly addressed so it reaches who it needs to. Also, check if there is any other recipient specified in the lease to whom notice must also be sent.
- Lastly, remember not all mistakes are fatal. As long as a notice meets any mandatory requirements in the lease, if there is any other ambiguity or minor error in a notice, the test for its validity will be whether the notice is sufficiently clear that a reasonable recipient of the notice would have understood its purpose and effect. So, not all mistakes will invalidate a notice. Nevertheless, you should make sure all key details of the lease are correct and that it is undeniably clear that the notice is a break notice and cannot be mis-interpreted.