On 2 December 2015, the curtain finally came down on Marks & Spencer's (M&S) dispute with its landlord BNP Paribas for the refund of £1.1million in rent following M&S exercising a break clause (Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72). M&S lost and, despite the rent relating to the period after the break, the court ruled that BNP Paribas could keep it. In fact, this decision was just a reaffirmation of the status quo, albeit a very expensive one for M&S.

A break clause is a clause in a lease that allows either the landlord or the tenant to terminate the lease early. In this article we will look at various issues that a tenant should consider to protect itself.

Break Date

Break dates can be specific dates, or by reference to the term, e.g. the end of the 5th year of the lease term. A break clause can be a rolling break, i.e. exercisable at any time (or at any time after a specified date) or a 'once and for all' break that is only exercisable on the specified date.

Notice

A break clause will require the tenant to serve notice, however there is significant difference between a requirement to give, e.g. six months' notice, and a requirement to give at least (or not less than) six months' notice.

A requirement to give six months' notice is a requirement to give exactly six months' notice; not one day more, not one day less. It is surprisingly easy to miscalculate precise notice periods in leases, so it would be very easy to give the incorrect length of notice and invalidate the break.

A requirement to give at least, or not less than, six months' notice allows the tenant to give as much notice as they like, as long as it is at least six months. This is easier to comply with and is obviously preferable for a tenant.

Time is of the essence for break dates, so if insufficient notice is given the break will not work.

The lease will include provisions specifying how notices generally must be given. Unless these general provisions are expressly excluded for break notices, they will apply and must be complied with. Sometimes the break clause also specifies the form that the notice must take. These provisions must be followed precisely, otherwise the break may well be invalid. A good, if a little extreme, example is in the case of Mannai Investment Co Limited v Eagle Star Life Assurance Co Limited (1997) AC 749. Lord Hoffman stated that, 'if the .. notice clause had said that the notice had to be on blue paper it would have been no good serving it on pink paper..'

Conditions

Landlords commonly look to impose conditions on tenant break clauses. Conditions must be strictly complied with. Even a small deviation can be enough to invalidate the break. Examples of common conditions and some of the dangers associated with them are set out below.

• A requirement to make all payments due under the lease by the break date.

Depending on how the condition is drafted, this will include annual rent, service charge, insurance rent and any other sums due under the lease. It can include default interest (i.e. interest payable due to late payment of other sums) even if the landlord has not demanded the interest is paid.

Such a condition could allow a landlord to raise an invoice the day before the break date, which would have to be paid.

Tenants should consider restricting the types of payments that are caught by this condition, e.g. limiting it to annual rent only, as this is known in advance. If the landlord insists on other sums being paid as well, the tenant should only agree to pay sums that are invoiced more than a certain period before the break date (e.g. one month) to give the tenant time to pay them.

• A requirement to pay all annual rent due under the lease.

There are particular considerations where payment of annual rent is a condition of the break. If the break date is part way through a rent payment period (e.g. rent is payable quarterly and the break date is part way through a quarter) then for the quarter day immediately before the break date the tenant must pay the full quarter's rent. It cannot only pay a proportion of that quarter's rent.

Continuing the above example, if the break date is on a quarter date, the tenant must pay the full quarter's rent due on that day, even though the lease is terminating that day.

Also, unless there is an express obligation in the lease, the landlord can keep any rent that relates to the period after the break date. There is no general obligation on the landlord to refund that part of the rent. This is what tripped up M&S in its claim against BNP Paribas.

• A requirement to comply with the tenant's covenants in the lease.

It is essentially impossible for a tenant to entirely comply with all of its lease covenants. There will almost always be items of disrepair that strictly speaking amount to a breach of the tenant's covenant to keep the premises in good repair. Such a condition could therefore invalidate the break, because the landlord will only have to find a minor breach of covenant to show that the condition has not been complied with.

Even an obligation to materially comply with tenant covenants leaves the break open to challenge after the event.

A requirement that the tenant gives vacant possession of the property.

Vacant possession is a whole topic in and of itself, however suffice to say that a vacant possession condition adds further uncertainty, as in practice what constitutes vacant possession in part depends on the circumstances of the case.

An example of where a vacant possession condition in a break clause caused problems for a tenant is the case of NYK Logistics (UK) Ltd v Ibrend Estates BV [2011] EWCA Civ 683. In this case the tenant's break clause included a requirement for the tenant to give vacant possession. There was no requirement for the tenant to repair the premises as a condition of the break, but the tenant wanted to do so anyway to control the repairs and avoid a dilapidations claim. The repairs were not completed by the break date, so two workmen employed by the tenant remained to finish the repairs. The tenant also employed a security guard for a week following the break date. The court held that this breached the vacant possession condition, so the break was ineffective and the lease continued.

Code for Leasing Business Premises

This is a non-binding code of practice for commercial leases. For break clauses the Code recommends that they are conditional only on the annual rent being up to date, the tenant having vacated the premises and there being no continuing subleases.

Conclusion

If a tenant wants to exercise a break clause it is key that it complies with all conditions, otherwise the break is likely to be invalid. If this is established through litigation then, months (or even years) after thinking it had terminated the lease, the tenant may find itself again responsible for the premises.

To discuss this or any other real estate commercial issue, please do not hesitate to contact the team.