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High Court issue reminder over break clauses in commercial property leases

The High Court has issued a reminder for tenants in Avocet Industrial Estates LLP v Merol Limited and another [2011] EWHC 3422 (Ch) of the important in complying fully with any conditions attached to break clauses in a lease in order to validly exercise the break.

Many tenants in the current climate can negotiate break clauses into their leases to enable them to bring their lease to an end early if they wish.  Landlords frequently have to agree this flexibility in order to attract tenants to their premises.

Landlords will commonly insert conditions precedent to the exercise of the break however, such as an obligation that the tenant has paid the rent up to the break date or complied with its covenants in the lease.  If these conditions are not fulfilled then the break is not valid and the term will continue beyond the break date, sometimes with catastrophic consequences for the tenants and their guarantors.

In the Avocet case the break clause stated that the rents due under the lease must be paid up to the break date.  The definition of ‘rents’ in the lease included not only the rent but also any interest due on the rent.  The tenant had paid some rent late and although the landlord had not issued any demands for default interest on the late rent, and although the rent was paid up to the break date, the interest due in respect of the late payments was not.

The High Court held that even though the interest was negligible the break clause had not been validly exercised because of the outstanding rents.   Tenants should be aware that break clauses represent a potential trap as far as their lease is concerned, and should always take legal advice from a commercial property solicitor prior to the exercise of a break.  It is also essential that the required period of notice is given to the landlord and that the notice is served in the form, and by the means required, in the lease.

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