Break Clauses in Dilapidations

A review of recent decisions and developments relating to a break clause, including validity of notices, service and estoppel, compliance with conditions and giving vacant possession.

Introduction

1. The purpose of this paper is to review of some recent decisions relating to the exercise of break notices. The form of this paper will take two parts.   This part, Part 1, will summarise some of the mechanics of break clauses that often arise for consideration. Part 2 contains a digest of recent break clause cases.
2. Given the current state of the property market, it is more usually the case that break clauses are being exercised by tenants rather than landlords. Tenants are cost conscious and are either alert to the possibility of competitive rents at alternative sites, or, for example, in the case of retailers are scaling down the size of the presence on the high street. HMV is a case in point. This paper therefore focuses on tenants’ break clauses as opposed to the landlords’, although the principles are generally the same.

Break clauses – an overview

Is there a break clause?

3. In most leases this is the simplest question to answer. The break clause is usually express, and will state whether it is a landlord or tenant only option, or both.   In addition, where there is an express break clause but it is silent as to who may exercise it, then it is treated as a tenant only option (Dann v Spurrier (1803) 3B&P 399).
4. Complications may arise where there is no express break clause but the language describing the length of term suggests that there is more than one possible fixed period under the lease. Consider a lease where the term was described as follows:

“The premises are hereby demised for a term of seven, fourteen or twenty one years”.

It was held that this created an option to break on year seven or fourteen, before certain determination after twenty one years; as it was silent as to who had the benefit of the option the tenant alone was entitled to exercise it (Dann v Spurrier (1803) 3B&P 399).

5. A different result followed where the wording was:

“The premises are hereby demised for a term of 21 years, determinable nevertheless in seven or fourteen years if the said parties hereto shall think fit.”

The court held that this did not even qualify as a break clause, as it required the agreement of both parties, and a break option is by definition a unilateral right (Fowell v Tranter (1864) 3 H&C 458).

Who gives the notice?

6. The ordinary case of a single specified landlord and single specified tenant raises no complications in answering this question. Equally simple is the principle that the notice is only exercisable by the tenant for the time being – beneficial ownership is not enough (Stait v Fenner [1912] 2 Ch 504). Where a lease is assigned, and unless the break option was expressly stated to be personal to the tenant, the benefit of the option will pass to the assignee.   This is true even if the “tenant” under the lease is not defined as including heirs, assigns and successors in title. An interesting case dealing with a case where the original tenant, who had a personal break option, assigned the lease and then took it back by a re-assignment, is considered in Part 2 below (Aviva Life and Pensions v Linpac Mouldings Ltd [2010] L&TR 182).
7. More complex issues may arise in cases such as these:

• Joint tenants: All of the tenants must exercise the option in order for the break to be effective, otherwise it fails – Hounslow LBC v Pilling [1993] 2 EGLR 59.
• Subsidiary or related company: Where the tenant is a company, and notice has been served by a subsidiary or related company, the notice may be construed as having been given by the tenant if the reasonable recipient would have understood the notice as such.   This is a reflection of the now well established principles regarding the interpretation of notices as per Mannai Investment Co Ltd v Eagle Star Insurance Co Ltd [1997] AC 749.   This means that the outcome will vary from case to case depending on the individual facts; there is no hard and fast rule. Application of the same principle had opposite outcomes in Lemmerbell Ltd v Briatnnia LAS Direct Ltd [1998] 3 EGLR 67, where Mannai did not save a notice, and Havant International Holdings Ltd v Lionsgate (H) Investments Ltd [2000] L&TR 297, where it did. This point will be discussed in more detail in Part 2.
• More complex questions may arise when categories (a) and (b) above combine. Consider the possibility of ABC Ltd and DEF Ltd, sister companies, as joint tenants of GHI Ltd. ABC Ltd serves a break notice. It may be that in the right circumstances the notice could be construed as being given in its own capacity as one of joint tenants, and at the same time as on behalf of its sister company, which would render the notice effective.
• Questions of agency may arise as well, where a notice is purportedly given on behalf of the tenant. As a matter of practice it is preferable to avoid serving notice on behalf of a tenant, even if the notice states “We, XYZ on behalf of ABC Ltd., hereby give notice…”. If the tenant has asked for your assistance in preparing the break option it would be safest for the notice to come from the tenant itself.    Agency arguments can however sometimes assist in saving a notice. In Stait v Fenner [1912] 2 Ch 504 a notice was treated as having been given on behalf of the real tenant even though the notice had been served by someone with a beneficial interest in the lease, contrary to the basic principle set out in paragraph 6 above. In practice one often encounters cases where managing agents have given a notice on behalf of a party to a lease. Specific agency may have been granted, and if the landlord is made aware of that, then it seems unlikely that the notice could be challenged. However general agency is also possible, and although less easy to establish, it can also be a proper basis for serving a notice on behalf of tenant, even if the tenant is not disclosed in the notice.   The principles relating to agency were explained by Peter Gibson LJ in Lemmerbell, and can be summarised as follows:
• Generally the notice must be given by the lessee or lessor. A notice given by someone who is not the lessee or lessor is invalid: see Lemon v Lardeur [1946] KB 613; Divall v Harrison [1992] 2 EGLR 64.
• A notice may be validly given by an agent acting on behalf of the lessee or lessor. If it states that it is being given by X on behalf of Y and X is duly authorised, it is valid: see Lemon v Lardeur; Divall v Harrison.
• If the notice is given by somebody other than the lessee or lessor without stating that that person is acting as an agent, it will be valid if:
• The giver was in fact duly authorised to give it; and
• The circumstances are such that the recipient can act upon the notice safely in the knowledge that it will be binding on the principal of the giver: see Jones v Phipps (1868) LR 3 QB 567.
• Those circumstances include cases where:
• The recipient knows that the giver was authorised to give the notice;
• The principal has held out the giver of the notice as authorised to give the notice;
• The recipient has been led to believe that the giver of the notice is the principal: see Jones v Phipps; Harmond Properties Ltd v Gajdzis [1968] 3 All ER 263.
• Otherwise, a notice given by a person who is not the lessee or lessor is bad.

8. The above principles were applied in Hexstone Holdings Ltd v AHC Westlink Ltd [2010] 2 EGLR 13. Looking at these categories it is apparent that Mannai arguments and agency arguments are two doctrines that can prove useful in trying to save a notice. In practice they are often run in the alternative (as indeed they were in Lemmerbell), and it is necessary therefore to keep them distinct.   The agency argument normally works on the basis that the notice contains no error at all, but correctly identifies the giver. The Mannai argument concedes that the notice is inaccurate in that it failed to identify the correct party, but asserts that the error was so obvious that no reasonable recipient could have been doubt as to who had in fact served the notice.
9. For the sake of completeness it is noted that estoppel, acquiescence and waiver by the recipient may also be useful points to consider when the effectiveness of a notice is in issue. Although as a number of the cases digested in Part 2 show, these concepts are by no means a general panacea for tenants who have botched their break notices.

Conditionality                                       

1. The central theme which runs through almost all the cases dealing with the exercise of break options is that conditions of exercise are strictly construed and must be strictly complied with. Cases may raise questions of better or worse compliance, and on occasion find a basis for saving a notice for one reason or another, but the touchstone of strict compliance remains. In Mannai Lord Hoffman famously (at least insofar as fame relative to landlord and tenant lawyers is concerned) commented that “if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease”. When advising in advance of the exercise of a break option therefore this must be treated as the guiding principle.Examples of common conditions are as follows:

• Conditions as to form, usually requiring notice to be writing. Verbal notice will then not be sufficient; this is long established, see e.g. Legg d. Scott v Benion (1738) Willes 43.
• Conditions as to service – specifying who is to be the recipient and to where it must be delivered.
• A condition requiring the up to date payment of rent.
• A condition requiring there to be no subsisting breaches of covenants under the lease. A condition not to be in breach is a condition precedent and must be strictly complied with.
• Payment of a liquidated sum.
• Vacant possession at the break date. There are various cases on this issue issues, including one discussed in Part 2 below. The main principle is that the premises must not contain a substantial physical impediment to their use by the landlord. They should be clear of personnel and chattels and the keys should be returned.

2. Many leases contain a combination in some form of all of the above. The wording of any condition should be scrutinised carefully and broken down into any constituent parts in order to best ensure that each requirement is met. The precise steps necessary for the drafting, service and timing of the notice are not likely to be the most difficult to comply with; the requirement that there be no existing breach of covenant often requires more of an effort, especially where, for example, the tenant has been in occupation for a long time and there is a catalogue of disrepair work that needs to be carried out.
3. Construing end of term dilapidation obligations is therefore often important. Consider, for example, a lease with a 20 year term, which requires the tenant to paint every five years and in the last year of term, and provides a break clause in year six, eleven, and sixteen. The tenant may end up having to paint two years running if he has complied in year ten, and then decided to break in year eleven (Bairstow Eves (Securities) Ltd v Ripley (1993) 65 P&Cr 220 is an example of this).   If a tenant is considering exercising a break option he should be mindful of any existing breaches and allow enough time to ensure that he is compliant before the break date in order to avoid being caught out. Minor breaches can also defeat the exercise of the option, but regard should also be had to the wording of the condition. If, for example, the break condition requires that there be no “subsisting material breach” of covenant that qualifies the nature of breach and may permit trivial or minor breaches.
4. On the other hand, it is not usually a requirement of a conditional break clause that there has been precise compliance with the terms of the lease throughout the term. Thus, spent breaches are not usually capable of preventing the exercise of the break option. So if, for example, the fact that a tenant has from time to time been in arrears of rent, this will not usually deprive the tenant of the entitlement to exercise the break. So too, it is suggested, that in the example given above, even if the tenant had not painted in year ten, but did paint in the final year of term, the failure to paint in year ten has been remedied and should not be allowed to defeat the exercise of the option. But, inevitably, these are questions of construction which fall to be determined on the precise terms of the relevant lease.
5. The question is whether there are any existing breaches of covenant at the relevant date. The requirement was put as follows by Clauson J in Simons v Associated Furnishers Ltd [1931] 1 Ch 379:

“…the condition [of compliance with the covenants in the lease] must be understood as ‘requiring that the account between the parties must, both as to rent and covenants, be clear; the rent need not have been always paid on the day; but all arrears, if any, must have been paid up; the covenants must have been strictly kept, or if broken, must have been satisfied.”

This approach was affirmed in the context of an option to extend the term of a lease in Bass Holdings Ltd v Morton Music Ltd [1988] 1 Ch 493.

6. It follows that as regards most conditional break clauses, a trawl to indentify historic breaches of covenant by the tenant will not avail the landlord. The principal difficulty in this context will be to identify whether a previous breach of covenant has been “spent” or whether it is still subsisting at the relevant date. This will not necessarily be entirely straightforward, but it is suggested that a practical approach to the question is whether the landlord could bring proceedings (for damages, even if only nominal, or forfeiture) in respect of the breach in question at the relevant date. If the tenant has rectified the breach by e.g. carrying out repairs to the requisite standard, it will be irrelevant that there has been a history of non-compliance.
7. In some cases there may be uncertainty as to what is required in order to achieve proper compliance.   Examples may be where there are disputed service charge sums outstanding, or where there is doubt as to the interpretation of any given covenant. In the first instance, and assuming there is more value in determining the tenancy than in the sums in dispute, it is likely to be sensible from a commercial perspective to pay the sums of money demanded in order to render the break notice effective.   Where contractual interpretation is an issue it might be possible to ask the landlord to confirm an agreed understanding in writing, but a shrewd landlord would probably reserve his position and leave it to the tenant to take an independent view. If the tenant wishes to pre-empt future argument, and assuming time allows, it could choose to bring Part 8 proceedings for a declaration on interpretation which would clarify what is necessary for compliance.

Joint Authors: Nathaniel Duckworth & Joseph Ollech

Falcon Chambers

We are a set of 10 Queen’s Counsel and 28 Junior Barristers specialising in landlord and tenant and real property law. Members of Chambers provide top-level advisory and litigation services, in England and Wales and abroad. Over the years, members of Chambers have been involved in many of the leading cases in its area of expertise which are set out on individual members’