The pitfalls of break options and what to avoid

Break options advice from Sanderson Weatherall associate partner Darren Slight…

The prevalence of break options in leases continues to increase due to occupiers’ ongoing requirements to achieve short, flexible lease terms when negotiating against landlords who ideally are seeking as long a lease terms as possible.

However, care and consideration needs to be taken in the way break clauses are drafted to ensure occupiers are not caught out by onerous break clause conditions.

Following the Riverside Park Limited v NHS Property Services Limited case, it is very important to identify what is a chattel and what is a fixture and fitting if the specific break option requires you to give up vacant possession.

In that case, the break was conditional on giving up vacant possession. However, the tenant’s partitioning was not removed by the break date and the court held that the tenant’s failure to remove the partitioning at that date effectively resulted in them not giving up vacant possession, which rendered the break option ineffective, resulting in the lease continuing.

It is therefore important that occupiers/ tenants avoid break options being conditional on giving vacant possession and instead insist on the wording “Giving up occupation free of subsisting tenancies” to avoid this pitfall.

Another area of contention/risk is when break options are drafted requiring the tenant to pay all rents and service charge in full at the break date even if that break date falls between quarter days.

Following the Marks & Spencer Plc v BNP Paribas Services Trust Company (Jersey) case, where M&S had to pay the insurance rent, a full quarter’s rent, car parking licence fees, service charge and a break premium up to the March quarter day, even though the break date in the lease was January 24, and then ultimately found that they could not reclaim the overpayment from the landlord after the event, it is important that any tenant who agrees to break options between quarter days should now ensure that there is an express provision requiring the landlord to refund any overpayment beyond the break date.

Ideally any break option should only require the tenant to pay the “basic rent” up to the break date to ensure there is no overpayment or uncertainty that might render any break ineffective.

Whilst the risks associated with break options currently remain, it is likely that the proposed new RICS Code for Leasing Business Premises that the RICS is currently consulting on will mitigate these risks going forward.

They are proposing to make RICS-regulated surveyors or firms follow mandatory requirements. One of the areas identified is break options.

They consider that there should be restrictions to there being no rent arrears, that only the basic rent should be paid up to the end date and that the tenant is only required to give up occupation to leave behind no sub-tennants or other occupiers.

If these proposals are introduced, it will hopefully avoid the previous pitfalls and ensure that tenants/occupiers are not trapped by onerous conditional break options going forward.

Darren Slight
Associate partner, Property Management & Lease Consultancy
Sanderson Weatherall LLP

 

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