Break Clause - Blunder Cost Tenant £200K

A recent Court of Appeal decision highlights the need for business tenants to take care when exercising its right to terminate a lease under a break clause. Getting it wrong can mean the tenant is saddled with paying rent and service charge for premises for which it has no use.

A break clause will have a string of conditions before termination of the lease succeeds. For example, it is often a condition that the tenant must leave the premises in a good state of repair and decoration. Vacant possession of the premises on the break date is often required. This means leaving the premises unoccupied and clear of the tenant's possessions and any rubbish.

In NYK Logistics (UK) Ltd v Ibrend Estates BV, in 2003 NYK took an assignment of a ten-year lease of a warehouse. When the premises became surplus to its requirements, NYK gave notice under a break clause in the lease terminating the lease on 3rd April 2009. The right to break was subject to NYK paying the rent up to the break date and giving vacant possession of the premises on the break date. It was not conditional upon NYK leaving the premises in a good state of repair and decoration. However, NYK was keen to control its costs and wanted to carry out repairs to the premises itself, rather than having to pay the Landlord to do them. The County Court ruled that by allowing its workman to have access to the premises after the break date so that they could complete the repairs, NYK had failed to give vacant possession and had not effectively terminated its lease. This decision has now been confirmed by the Court of Appeal.

Some might consider this decision to be rather harsh. NYK behaved in what many would regard to be a commercially sensible way. It had emailed Ibrend with its proposal to remain in the premises for an extra week whilst it did the works. Ibrend did not reply. NYK's fatal mistake was to interpret Ibrend's silence as agreement.

In this case all was not lost. Fortunately, NYK had a further right to break the lease terminate eight months later, which it correctly exercised. However, they still had to pay an extra eight months' rent (some £200K) and legal costs. In another case, a tenant might find itself on the hook for a substantial period. In the current market, assignment of the lease may not be an option.

We have extensive experience in advising both landlords and tenants on the issues that arise on the operation of break clauses. To find out more, please contact Caroline Wilton or Martin Banham-Hall.

Filed: 24/11/2011 08:29:35