Posted on 6th March 2012

Struggling Businesses Dealt a Blow over Break Clauses

Commercial property experts at Latimer Hinks Solicitors are warning companies to check the small print on leases to avoid being dealt a blow by landlords refusing to accept break clauses when rents are late.

The Darlington based firms warning follows a court ruling where tenants were left unable to end a lease because they had not complied with the small print on interest payments for late rent.

Neil Stevenson, a Partner and commercial property lawyer at Latimer Hinks, has advised a number of clients on this is sue in recent weeks. He said: "Commercial leases are normally granted for a specified period, such as five or 10 years. A long lease gives security both to the landlord and to the tenant, but being able to end the lease early gives flexibility in case circumstances change.

"Thats why many commercial leases contain a so-called break clause, allowing the landlord or tenant to terminate the lease early on an agreed date. But the lease is likely to say that the tenant can only terminate the lease if the rent is paid up to date and all the other tenant obligations have been complied with.

This was the case in Avocet Industrial Estates LLP v Merol Ltd, where Merols right to end the lease early was on condition that all money due to the landlord under the lease had been paid at the break date.

Tenants Merol had often been late in paying the rent and, although it was up to date at the time of the break clause, the lease also stated that interest was payable on any rent paid late. Although Avocet had never demanded interest, when Merol tried to terminate the lease the landlord claimed that the tenant had lost their right, because interest had not been paid on the late rents.

Despite the interest amounting to just £130, compared with an annual rent of £67,500, the High Court judge came down on Avocets side. According to Neil, the ruling in this la test case comes as no surprise in current economic conditions.

He said: "This case may seem harsh, but although break clauses are becoming common, the right to end a lease early is still a privilege, so any conditions must be satisfied to the letter. In this climate, landlords want to hold on to tenants, so planning for break clauses needs careful thought - even before the lease is entered into.

"When negotiating terms with a landlord, its vital for a tenant to be sure that they are going to be able to comply with all the tenant obligations all too often we see a lease where the landlord goes for a general catch-all clause that is almost impossible to meet, because compliance could fall down over a piece of sticky tape left on the wall.

"And when it comes to exercising the right, the best thing is for a tenant to take a good look at their lease, check their payment history and if possible rectify anything so they are up to date before they give notice. It is the tenants responsibility to make sure they have strictly complied with all the conditions and that they cannot assume all is well just because the landlord has said nothing.

"The outcome for Merol gives a stark warning to tenants of what happens otherwise.
For further information contact Neil Stevenson on 01325 341500