Giving with one hand and taking back with the other break clauses.
The law can be very harsh if applied without reference to the commercial sense which lies behind the words used to document an agreement. The operation and interpretation of ‘get out’ or break clauses are a good example. Back in the 19th century the golden rule of interpretation was set out in Grey v Pearson that courts should strive to ‘adhere as rigidly as possible to the express words that are found and to give those words their natural and ordinary meaning’. Since then judges have moved towards a more commercial approach and where words could have two meanings they will follow the meaning consistent with good business sense. But how can this approach apply where the parties have different commercial intentions, as is often the case with a break clause?During negotiations for a new commercial lease the tenant worries whether he will need the premises for the whole term, he is only too well aware that in these current turbulent times predicting long term needs for space in any sector is a challenge. On the other side of the bargaining fence the landlord will be seeking to secure his new tenant for a s long as possible, but will be advised that ‘get out’ or break clauses are commonly acceded to and are hard to resist. Of course, the landlord does not want the tenant to break the lease early, but feels forced to accept the concession to let his premises. It is because the deal struck is not actually what one party wants at all, i.e. the lease will be ended early, that landlords and tenants find themselves in court fighting over the interpretation and operation of the break clause later on.The agents negotiating the heads of terms will often record the bare bones of the agreement reached for a break clause operable by the tenant for example at the fifth anniversary of the ten year term - a one off opportunity to end the contractual arrangement. The heads are duly circulated and the tenant receives a draft lease form the landlord’s solicitors. The wording of the break clause sows the seeds for all sorts of traps into which the hapless tenant might fall later on in the term. What was negotiated as a concession to give the tenant comfort before he signs up can easily turn into a nightmare when he seeks to rely on that earlier agreement. The tenant can be forgiven for thinking that he can break the lease and that is the end of it for him, but hopefully he will have taken legal advice and be put on notice that things may not be as simple as they seem.Most break clauses (prepared for the landlord) will contain conditions that the break will be ineffective if the tenant is in breach of the tenant covenants, has not paid all payments due to the landlord under the lease or fails to deliver vacant possession. On top of that, the way in which the tenant serves his notice of the break clause is prescribed often elsewhere in the small print of the lease. Get that part wrong and the tenant will not even make first base towards exiting his rental obligations in the lease. While the courts have adopted a helpful approach to badly prepared notices in the past (finding that if the landlord was not actually misled by the error and that the meaning could be construed clearly irrespective of the error) then the notice will be valid. However, things have recently taken a turn for the worse for the tenant.The courts have supported landlords preventing the break clause being used by the tenant to end the lease, by saying that the tenant has missed a minor obligation – perhaps the tenant did not request consent to put up a sign, or missed a decorating obligation, or he might say that the tenant failed to make all payments due e.g. the tenant has not paid his last full quarter’s rent because the break is mid quarter. Or perhaps a payment to the landlord for insurance is late. The list goes on. the break fails and the tenant remains locked into his lease., In a recent case decided on 19 December 2011, Avocet Industrial Estates LLP –v- Merol Ltd [2011] EWHC 3422 (Ch) a tenant lost the right to end his lease because the lease had a standard clause in it that provided for interest on late rent payments to be paid. The tenant had been in arrears in the past, but the landlord had not charged interest (as many do not) but the judge said that because the interest did not have to be demanded it was payable and due, hence the break was lost. The amount was £130 on a total rental liability of £300,000 per annum. The judge’s explanation -“I consider that the result in this case is a harsh one but, applying legal principle, it is one which I am obliged to reach.”Tenant’s solicitors will no doubt be adapting their advice to clients who seek advice before they exercise a break clause to trawl through rent payment records for any late payment and to offer up the interest before exercising the break.Objecting firmly to conditions on the break clause in the first place would go a long way to preventing these disputes and agents negotiating the terms of a new lease could helpfully spell out the deal actually on offer, either an unconditional break, or subject to conditions.One thing is certain, any tenant wishing to rely on his break clause needs to be very careful indeed to ensure that he avoids all the traps waiting to defeat him, when exercising his break to exit the lease.