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12 December 2016

The Need for Caution when Exercising Break Rights

In this period of economic uncertainty, an increasing number of Tenants will exercise break rights within their commercial leases and in this weak market, Landlords will challenge defective notices, or compliance with break conditions wherever possible. Whilst the costs savings for businesses in exiting commercial leases could be significant, so too can the risks involved. Failure to serve a valid break notice could result in a business remaining liable and tied into the property with long-term and unwanted commitments.

Case Law

In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997], Lord Hoffman famously said:

“….if the clause had said that the notice had to be on blue paper, it would have been no good serving the notice on pink paper, however clear it might have been that the Tenant wanted to terminate the lease”.

This case makes it clear that strict compliance with both contractual break conditions and any particular service provisions is required in order for a break to be effective.

This was reaffirmed in the recent case of Vanquish Properties (UK) Ltd Partnership v Brook Street (UK) Ltd [2016]. The lease contained a one-off break option for the Landlord to terminate the lease on a specified break date. The Landlord had granted an overriding lease to ‘Vanquish Properties (UK) Limited Partnership acting by its general partner Vanquish Properties GP Limited’. There was no mention of the four other limited partners in the lease. Vanquish Properties (UK) Limited Partnership served a break notice upon the Tenant, Brook Street, on the grounds that it wanted possession for redevelopment purposes. However, the notices were in the name of the Limited Partnership alone. The Court found that since a limited partnership does not have a separate legal entity and cannot hold land in its own name, the overriding lease was granted only to Vanquish Properties GP Limited and therefore the notices should fail as they were not served by the correct entity. The Tenant also argued that the incorrect name on the notice could not be saved under the principle developed in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd as the ‘reasonable recipient’ would be confused. The High Court agreed with Tenant and the right to break the lease was lost as by this time the deadline for service had passed and no further/alternative notice could be served. This meant that the Landlord was tied into the lease for the remainder of the term.

Practice Point

Therefore, very careful consideration must always be given to the exercise of any break, and the earlier a business seeks professional advice on its exit strategy the better. The starting point is to examine the lease very carefully in order to establish the contractual provisions governing the option to break, any conditions must be complied with and any particular requirements for service must be considered in detail (including when the notice must be given, how the notice must be served, on whom the notice must be served and by whom it must be served).