Lease Termination Options and issues

Transcription

1 Lease Termination Options and issues 28 May 2014

2 Contents 1. Introduction Act protected tenancies What protection does the Act give? Which tenancies does the Act apply to? If protection is automatic, how do you terminate? Termination of the lease Termination initiated by the tenant (s27) Termination initiated by the landlord (s25) Renewal initiated by the tenant (s26) Opposition by the landlord statutory grounds Compensation 5 3. End of a fixed term contracted out tenancy When the tenant vacates requirement for delivery of possession Implied position Express terms When the tenant stays consequences of remaining in occupation On what basis? Avoiding the problem What should you do if a former tenant is in occupation? 9 4. Ending a periodic tenancy What notice is required? What is the effect of a notice to quit? Break clauses Nature of break clause Act protected tenancies Subleases Who may exercise the break? When the break may be exercised Fixed date Rolling date Serving the notice Period of notice Form of notice Party authorised to sign the notice Method of service Conditions Problems with service Break conditions Types of break condition Relevant time for compliance Examples of break conditions Waiving compliance with conditions Practical issues for a tenant exercising a break Before service of the notice Service of the notice Compliance with conditions Surrender of the lease What is a surrender? Types of surrender Express surrender 15

3 6.2.2 Surrender by operation of law Surrender and re-grant Agreement to surrender Offer-back clauses Surrenders of part Effect of surrender Between landlord and tenant Subtenants Practical issues for the parties Landlord Tenant Forfeiture the right of re-entry Nature of the forfeiture right Reason for forfeiture Forfeiture for non-payment of rent Forfeiture for other breaches of covenant Waiver What acts amount to waiver? Once and for all or continuing breach The act of forfeiture - court proceedings or peaceable re-entry? Peaceable re-entry Court proceedings Relief from forfeiture Disclaimer How to disclaim Landlord s notice to elect Practical effect of a disclaimer: former tenants and guarantors The position of subtenants Vesting orders Landlord s rights at the end of the term Recovery of possession at the end of the term Changing the locks Possession proceedings in court Damages for continued occupation Mesne Profits Action for double value (after landlord's notice) Action for double rent (after tenant's notice) Property left on the premises Fixtures or chattels Landlord as involuntary bailee Terminal dilapidations What are dilapidations? Disrepair Reinstatement Pre-action Dilapidations Protocol 31 Annex 1 Forfeiture in an insolvency situation Annex 2 Effect of termination on subleases... 33

4 1. Introduction There are a number of different ways in which a lease can come to an end. The appropriate method of termination depends various factors including whether or not the lease has the protection of the Landlord and Tenant Act 1954 (the 1954 Act ), which party wants to bring the lease to an end, whether the lease is coming to a natural end or either the landlord or the tenant wants to get out of it early, and whether or not the tenant is in breach of any of the lease terms. These notes look at some of the key considerations when a lease is being brought to an end in each of the following situations: The lease is a 1954 Act protected business tenancy and the tenant will not be renewing the lease at expiry (either because he wants to go or because the landlord wants him to go). The lease is not protected and the tenant will not be taking a new lease at expiry (including the position if the tenant remains in occupation). The tenant fails to comply with the lease terms and the landlord wishes to bring the lease to an early end (forfeiture). Either the landlord or the tenant has a break clause written into the lease which he wishes to exercise in order to bring the lease to an early end. The tenant wants to surrender the lease (or the landlord wants to take a surrender) in order to bring the lease to an early end. The tenant is insolvent and the insolvency practitioners wish to disclaim the lease. The notes also look briefly at recovery of possession where the tenant remains in occupation as a trespasser and at terminal dilapidations and reinstatement requirements which may be relevant regardless of the way in which the lease is terminated. Each of these topics could be a whole paper in its own right, so the purpose of this note is simply to provide an understanding of the principal ways in which a lease may come to an end and to give an overview of the key issues Act protected tenancies Part II of the 1954 Act offers statutory protection to business tenants. It is possible for the landlord and tenant to agree that this protection will not apply to a particular lease by following the specified contracting out procedures. 2.1 What protection does the Act give? There are two parts to the protection offered by the Act 1 : At the end of the fixed term, a protected tenancy will not come to an end. Instead, it will automatically continue on the same terms until it is terminated in accordance with the Act. This is known as a continuation tenancy. When the tenancy is terminated in accordance with the Act, the tenant has a right to a new tenancy at a market rent (a renewal lease ). The landlord can object to this but only on one of a number of specified grounds, and he has to prove these grounds Which tenancies does the Act apply to? The Act applies to any tenancy where the property comprised in the tenancy is or includes premises which are occupied by the tenant and are so occupied for the purposes of a business carried on by him for those or other purposes 2. This sounds quite straightforward but has a number of elements to it: a) What is a tenancy? A tenancy includes a lease (including a periodic tenancy), an agreement for lease and a sublease (even an unauthorised one) 3. It does not include a 1 Section 24(1), 1954 Act 2 Section 23, 1954 Act 3 Section 69(1), 1954 Act -1-

5 licence; however, there is a fine line between what amounts to a lease and what is merely a licence, so a landlord should not rely on this distinction! There are a number of types of tenancy which are specifically excluded, the most significant being tenancies at will 4, agricultural, farm and mining leases, and fixed term tenancies of six months or less (provided there is no right to renew beyond six months and the tenant is not in occupation for more than 12 months in total) 5. b) What is a business purpose? Business is widely defined to include a trade, profession or employment. It includes any activity carried on by a body of persons, whether corporate or unincorporate. This catches not only traditional business uses but also many recreational uses, such as sporting clubs and youth groups 6. Where the premises are mixed use they will have the protection of the Act if the business activity is a significant purpose of the occupation 7 (so a property consisting of a flat over a shop is likely to be caught while a house with one room used as an occasional home office will almost certainly not be). A business use which is in breach of a lease covenant will still count where the lease permits some other business use. However, where the lease prohibits all business use the tenant will not gain protection unless the landlord has consented to, or acquiesced in, the breach 8. c) What is occupation? Occupation requires control and use together with some kind of physical occupation. However, the physical occupation need not be continuous provided that the right to occupy continues 9. For a tenant to be in occupation he does not have to personally be in occupation. Instead he may occupy through a manager or agent 10. There is also a great deal of flexibility with regards to occupation by group companies: where the tenant is an individual, occupation may be by a company that he controls and vice versa 11. In addition, occupation may be by any company in the same group as the tenant, including a company which is controlled by the same individual as controls the tenant If protection is automatic, how do you terminate? Whilst the continuation of the tenancy at the end of the fixed term is automatic, termination is possible provided you follow specific procedures and can, in the landlord s case, make out certain grounds to terminate. There are specified forms which have to be used and time limits which must be complied with. If these procedures are not followed correctly there are significant consequences the tenant may lose his right to renew or the landlord may lose his right to terminate. 2.2 Termination of the lease Termination of the lease may be initiated by either party. Note that the protection of the Act exists for the benefit of the tenant: a tenant can object to a landlord s refusal to grant a renewal lease and can require that a new lease is granted unless the landlord proves certain grounds. However, the landlord cannot object to a tenant s decision to terminate the lease and cannot require that the tenant takes a new lease if he does not want one. 4 Wheeler v Mercer [1957] AC 416, Manfield & Sons v Botchin [1970] 2 QB 5 Section 43(3), 1954 Act 6 Section 23(2), 1954 Act 7 Cheryl Investments v Saldanha [1978] 1 WLR Section 23(4), 1954 Act 9 Hancock & Willis v GMS Syndicate [1983] 1 EGLR Parkes v Westminster Roman Catholic Diocese Trustee [1978] 36 P & CR Section 23(1A), 1954 Act 12 Section 42, 1954 Act -2-

6 2.2.1 Termination initiated by the tenant (s27) a) Tenant does not want the lease to continue beyond the original fixed term If a tenant does not want the lease to continue beyond the contractual termination date, he has two options: The tenant can simply vacate by the contractual expiry date of the original lease. The original lease will come to an end and the tenant will not have any further liability in respect of it 13. Alternatively the tenant can serve a section 27(1) notice on the landlord, giving at least three months notice and expiring at lease end, that he is intending to vacate 14. If the tenant serves a section 27(1) notice but then remains in occupation the tenancy will come to an end and the tenant will become a trespasser. There is no prescribed form for this notice, though it must be in writing. The use of either of these options is possible even if the landlord has already served a section 25 notice giving a termination date which is later than the contractual termination date. However, note that in these circumstances the tenant has no obligation to tell the landlord that he intends to vacate he is not required to serve a section 27(1) notice. If a landlord wishes to prompt a recalcitrant tenant into telling him whether he plans to stay, his only option is to serve a section 25 notice and issue proceedings. b) Tenant wants to terminate a lease once it is continuing (s27(2)) If a tenant wishes to vacate once he is holding over following the expiry of the contractual term, he must serve a section 27(2) notice on the landlord (no prescribed form, though it must be in writing). This notice must give at least three months notice of termination 15. Note that the old rules which required the notice to expire on a quarter day no longer apply. The notice can end on any day and there are statutory rules for apportioning any rent which has been paid in advance. Where a section 25 notice has been served by the landlord and the tenant wishes to vacate earlier than the specified termination date, he is still able to serve a s27 notice, bringing the tenancy to an end at an earlier date (though not at a later date) Termination initiated by the landlord (s25) If the landlord wishes to terminate the tenancy he must serve a section 25 notice (in the prescribed form 16 ) on the tenant 17. As there are different section 25 notices for use in different situations it is important that the correct one is used. The section 25 notice must comply with the following requirements: It must state the date upon which the landlord wants the existing lease to end. This date cannot be any earlier than the contractual expiry date of the lease. For a periodic tenancy, this is the date on which the landlord would have been able to terminate by notice if the tenancy were not protected. Where the lease contains a break clause and the landlord wants to break the lease, he can specify the break date as the termination date. It must be served not more than 12 months nor less than 6 months before the termination date given in the notice 18. It must specify which of the grounds for termination the landlord is relying on. He cannot later amend these grounds so careful consideration must be 13 Section 27(1A), 1954 Act 14 Section 27(1), 1954 Act 15 Section 27(2), 1954 Act 16 Form 2, Schedule 2, Landlord and Tenant Act 1954, Part 2 (Notices) Regulations Section 25(1), 1954 Act 18 Section 25(2), 1954 Act -3-

7 given to them, particularly bearing in mind the tenant s right to compensation where the lease is terminated only on no-fault grounds (see paragraph below). It must be given by, or on behalf of, the landlord. If there are joint landlords then all of their names must be given. The tenant is not required to give any kind of a response to this notice. He may be willing to give up possession, but the landlord will not know this until he moves out on the specified termination date. If the tenant does not want to give up possession he will need to make an application to the court, but he has until the specified termination date to make this application. Due to this lack of certainty a landlord may decide to make an application to the court for termination of the lease Renewal initiated by the tenant (s26) Where the tenant wishes to request a new tenancy he must serve a section 26 notice (in the prescribed form and complying with the strict time limits) on the landlord. If the landlord is happy to grant a new tenancy he does not need to do anything to terminate the lease and the renewal process will follow. However, if he opposes renewal on one of the statutory grounds he must serve a counter notice within two months of the section 26 notice 19. This counter notice must specify which of the grounds for termination the landlord is relying on (paragraph below). There is no prescribed form for the counter notice, but it must be in writing, and the exact wording must be used for the relevant grounds for termination Opposition by the landlord statutory grounds The landlord is only able to oppose renewal on one (or more) of the following statutory grounds 20 : (a) (b) (c) (d) (e) (f) The Tenant has failed to maintain or repair the premises the landlord will have to show that the tenant was under an obligation to maintain or repair and that he is in breach of this obligation. The landlord is only likely to succeed on this ground if the breach is serious and unremedied 21. The court will also take into account the tenant s willingness to accept an obligation in the new lease to put the property into repair 22. The Tenant has persistently delayed in paying rent the tenant must have fallen into arrears on several occasions, but the arrears need not have been substantial or long lasting 23 and there need not be any arrears at the date of the hearing. There are substantial breaches of the obligations under the tenancy or objections to the manner in which the Tenant uses or manages the holding this will require some substantial reason. The real question is whether the landlord s interest has been prejudiced by the breaches 24. The Landlord can offer alternative accommodation this must be offered on reasonable terms having regard to the current tenancy and must be suitable to the tenant s requirements. There are complex subtenancies and the landlord could obtain a better rental return if the premises were let/sold as part of a larger unit this ground is rarely used as it is very difficult to satisfy the requirements. The Landlord has an intention to demolish or reconstruct the premises on the termination of the current tenancy or intends to carry out substantial work of construction on the holding and could not reasonably do so without obtaining possession this is the most frequently used ground. The 19 Section 26(6), 1954 Act 20 Section 30(1), 1954 Act 21 Lyons v Central Commercial Properties [1958] 1 WLR Nihad v Chain (1956) 167 EG Horrowitz v Ferrand [1956] CLY Beard (Formerly Coleman) v Williams [1986] 1 EGLR

8 (g) Landlord must show that it has a genuine intention 25 and reasonable prospect of carrying out the work 26 ; evidence of this may include preparation and approval of plans, a successful application for planning permission and evidence of the necessary financial ability 27. The intention must be that of the competent landlord at termination of the tenancy 28. The date on which the intention must be established is the date of the eventual trial 29. The Landlord intends to occupy the building for his own business this is another frequently used ground. There is no requirement that the landlord intends to occupy for a particular length of time but short-term occupation will not be sufficient for this ground: for example if the landlord has a fixed and settled intention to sell within the next few months it does not have the requisite intention 30. It is important to be aware of the five year rule: the landlord can only rely on this ground if his interest was purchased (meaning bought for money 31 ) or created 32 at least five years before the date specified in the section 25 or 26 notice 33. Grounds (a), (b), (c) and (e) are discretionary; the court will consider all of the circumstances and decide whether it is reasonable to refuse to grant a new lease to the tenant on the grounds specified. By contrast, grounds (d), (f) and (g) are mandatory and if the Landlord can prove the requisite conditions and intentions for the particular ground the court must order the termination of the tenancy. For grounds (f) and (g) the facts relevant to the ground relied upon only have to be judged as at the date of the substantive trial of the landlord s grounds of opposition the landlord does not need to be able to prove the necessary intention at the date on which the notice is given or at a summary judgment hearing 34. However, an offer of alternative accommodation should probably already have been made before the landlord can specify ground (d) Compensation If the landlord relies solely on the no-fault grounds ((e), (f) or (g)) then statutory compensation may be payable to the tenant. Compensation is fixed at one times rateable value 36 unless it can be shown that the tenant s business had been carried on at the premises for at least 14 years preceding the termination of the tenancy (though not necessarily by the current tenant), in which case the tenant is entitled to two times rateable value 37. Compensation is only available on quitting the premises and only where 38 : the landlord s notice specifies only one or more of these no-fault grounds and the tenant either: o o does not apply to the court, or does so but withdraws his application; or applies to the court but his application is refused because the landlord is able to establish one or more of these grounds; or 25 Fisher v Taylor s Furnishing Stores [1956] 2 QB Reohorn v Barry Corporation [1956] 1 WLR Woodfall contains a lot of detail on how this ground may be satisfied at Chapter Morris Marks v British Waterways Board [1963] 1 WLR 1008, CA an intention to sell to a develop is not enough: Ahern (PF) & Sons v Hunt [1988] 1 EGLR 74, CA 29 Somerfield Stores v Spring (Sutton Coldfield) (No.2) [2011] L & TR Patel and another v Keles and another [2009] EWCA Civ HL Bolton Engineering Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159 so the rule doesn t preclude landlords who acquired for no value, for example on a surrender or transfer for no value 32 The creation of a lease occurs when it is executed and not when it is expressed to begin or when it is registered; where there is an agreement for lease the interest is created when the agreement becomes specifically enforceable 33 Section 30(2), 1954 Act 34 Somerfield Stores Ltd v Spring (Sutton Coldfield) Ltd (In Administration) [2010] EWCH Betty s Cafes Ltd v Phillips Furnishing Stores Ltd (No 1) [1959] AC Section 37(2), 1954 Act 37 Section 37(3), 1954 Act 38 Section 37, 1954 Act -5-

9 the landlord s notice specifies one or more of these grounds together with other grounds, the tenant applies for a new tenancy and his application is refused based solely on one of these grounds. 3. End of a fixed term contracted out tenancy A lease which is granted for a fixed term and does not have statutory protection expires when the term comes to an end. It does so automatically and without notice 39. At the end of the term the tenant must give up possession of the demised property. 3.1 When the tenant vacates requirement for delivery of possession Implied position a) Tenants If a lease does not contain a yield up clause, it is implied by law that the tenant must deliver possession to the landlord at the end of the contractual term 40, together with anything that has become part of the demised property during the term 41. b) Subtenants This implied obligation also includes procuring that any sub-tenant gives up possession 42. Where the premises are still occupied by a subtenant on expiry, the tenant will be liable in damages for breach, even if the sub-tenant wrongfully refused to vacate. The tenant will be liable for the period of the subtenant s occupation after expiry, together with any costs incurred by the landlord in suing the subtenant to recover possession 43. If the subtenant has a protected tenancy entitling it to stay in possession even after the tenant's lease has ended, the tenant will not have to pay compensation for use and occupation relating to any period after the end of its own tenancy as long as it has done everything it can to give possession to the landlord 44. Where only part of the property is sublet, similar principles apply. If a landlord is effectively kept out of possession of the whole because part of it remains in the possession of a subtenant, the landlord may recover damages equal to the lost rental value of the whole property Express terms Most written leases do not rely on the implied position. Instead they will contain an express obligation on the tenant to yield up possession at the expiry or earlier ending of the term in compliance with the covenants in the lease. The relevant clauses that this must be read in conjunction with are the repair, decoration, alterations and signage clauses. The obligation to yield up possession will generally specify that the tenant must give up vacant possession rather than just giving up occupation. In this case the lease will usually provide that, if the tenant has left items at the property after expiry, the landlord may remove, store and dispose of them at the tenant's cost. The landlord may then sue under this clause to recover these costs. For failure to give vacant possession on expiry, the sum recoverable from the tenant is likely to be modest in comparison to the same breach where the lease has ended due to the expiry of a break notice where delivery of vacant possession was a condition of the break. The requirements for vacant possession are covered in more detail in the context of break clauses (see paragraph 5.5.3(b) below). 39 Cobb v Stokes (1807) 8 East Henderson v Squire (1869) LR 4 QB John Laing Construction v Amber Pass [2004] 2 EGLR Harding v Crethorn (1793) 1 Esp Henderson v Squire (1869) LR 4 QB Reynolds v Bannerman [1922] 1 KB Henderson v Squire (1869) LR 4 QB

10 3.2 When the tenant stays consequences of remaining in occupation On what basis? Where a lease has expired and the former tenant continues to occupy then, in the absence of any formal agreement, the basis of occupation depends on the circumstances and conduct of the parties. However, it is important that you ascertain the basis of occupation; if a periodic tenancy has arisen the tenant will acquire 1954 Act protection and it may be a lot more difficult for the landlord to recover possession. Occupation is likely to be as one of the following: Trespasser Tenant on sufferance Tenant at will Implied periodic tenant It s possible, though very unlikely, that there will an implied licence; this would require a complete change in the nature of the occupation. Depending on the nature of occupation the tenant may be liable for mesne profits or double value (see paragraph 9.2 below). a) Trespasser Where the landlord has indicated that he wishes to recover possession of the premises the tenant is likely to be a trespasser, even if the situation is then allowed to continue without proceedings being taken for several months 46. See paragraph 9.1 below for the steps that the landlord can take to recover possession and paragraph 9.2 for the landlord s damages claim. b) Tenant on sufferance A tenancy on sufferance arises when a tenant wrongfully remains in occupation after its lease has expired and the landlord hasn t given any indication of whether or not it is willing for the tenant to remain 47. The landlord is able to recover possession without any prior demand and can claim for mesne profits (see paragraphs 9.1 and 9.2 below). c) Tenancy at will A tenancy at will is unlikely to be inferred if the landlord has given any indication that it intends to recover possession. Where negotiations are taking place for a new lease it is likely that occupation will be as a tenant at will, even if rent is being paid and accepted 48. The terms of the tenancy at will are established by reference to the expired lease save where these are inconsistent with the nature of a tenancy at will or where there is evidence of a different intention. Terminating a tenancy at will If the tenant wishes to terminate he must give notice and give up possession 49. Notice alone will not be sufficient. There is no need for the landlord to give any notice in order to terminate a tenancy at will (an express document which requires notice to be given is unlikely to be a tenancy at will, as this is a key feature of the arrangement). A tenancy at will can be terminated by the landlord making a demand for possession 50 (for example demanding the return of the key 51 ), sending a letter 46 Westminster City Council v Basson (1991) 62 P & CR Remon v City of London Real Property Co [1921] 1 KB Javad v Aqil [1991] 1 WLR Stevenson v J Barnett & Co (London Ltd) [2004] All ER (D) Fox v Hunter-Paterson [1948] 2 All ER Pollen v Brewer (1859) 7 CBNS

11 before action or initiating possession proceedings. The tenant has the right, for a reasonable period, to enter the property and remove his possessions. If the tenant does not vacate following a demand, possession can be recovered see paragraph 9 below. d) Periodic tenancy A periodic tenancy is likely to be implied where there are no negotiations for a new lease (or the negotiations stall or break down) 52 but the landlord and tenant relationship is still active. The principal example of an active landlord/tenant relationship is the demand and acceptance of rent. As for a tenancy at will, the terms of an implied periodic tenancy are established by reference to the expired lease, save where there is evidence of a different intention 53. The moment that a periodic tenancy exists then (provided the tenant is using the premises for business purposes) the tenant will have a protected business tenancy. It is therefore advisable to avoid any argument as to whether a protected business tenancy has arisen by taking active steps see paragraph below. Terminating an implied periodic tenancy Where a periodic tenancy arises which is not a protected tenancy (for example, if someone is using space to store personal possessions or to pursue a hobby) it can be terminated by notice. Assuming that an annual rent was reserved under the previous lease the periodic tenancy will almost certainly be a tenancy from year to year, terminable on the anniversary of the old tenancy term 54. A half year s notice must be given (this may be either six months or two quarters ) 55. Note that where the periodic tenancy is a business lease this timing determines the earliest date on which the contractual term can be brought to an end and therefore the earliest date on which the s25 notice can expire Avoiding the problem In an ideal world the problem will be avoided by taking active steps prior to expiry of the lease. The landlord or his managing agents should contact the tenant at least six months prior to lease expiry to ascertain his plans, and should communicate this to the lawyer acting as soon as possible. If the tenant indicates that he wishes to remain, negotiations should start immediately for a new lease, with the aim of completing this before expiry of the current one. However, if a few weeks before lease expiry it isn t known whether the tenant is staying or leaving, or a new lease will not be completed on time, the best practice is as follows: Send an open letter demanding possession of the property upon lease expiry; consider whether to refer to s1 of the Landlord and Tenant Act 1730, entitling the landlord to claim double value (see paragraph below). If the landlord wishes to enter into a new lease, send a separate letter at the same time as the open letter stating that the landlord doesn t intend to issue possession proceedings for a short period (until a stipulated date) to allow negotiations to take place, with a request that the tenant sign and return a copy of this. Considering putting a rent stop in place to ensure that no rent (whether as rent or mesne profits) is demanded or collected in respect of any period after the 52 Walji and others v Mount Cook Land Ltd [2000] EWCA Civ Digby v Atkinson (1815) 4 Camp Croft v Blay Ltd [1919] 2 Ch Parker d. Walker v Constable (1769) 3 Wils 25-8-

12 lease has expired this helps to avoid arguments about whether there is a periodic tenancy or a tenancy at will and mesne profits can always be recovered once the situation is resolved. Alternatively, where negotiations for a new lease are already in progress, the landlord may consider requiring the tenant to enter into a formal tenancy at will What should you do if a former tenant is in occupation? 4. Ending a periodic tenancy You should always seek to regularise the position as soon as possible. If the landlord is happy for the tenant to remain, he should send an open letter demanding possession together with a separate without prejudice letter stating that no possession proceedings will be taken for a specified period and requiring the completion of a tenancy at will. A rent stop should also be considered (see paragraph above). If the landlord wishes to recover possession of the property he should write to the former tenant stating that it is acting as a trespasser and requiring immediate vacant possession. Though this isn t something that arises very often in commercial practice it is important that you are aware of the notice that must be given in order to terminate a periodic tenancy. It is most likely to be an issue where a tenant has been allowed into occupation without any kind of formal documentation or where a tenant has been allowed to remain in occupation at the end of his fixed term tenancy. Where the tenant occupies for business purposes he will gain 1954 Act protection as soon as the tenancy arises. A periodic tenancy will always run by reference to a particular period (such as a week, a month or a year), until it is terminated by either party giving notice. It can be created expressly or impliedly. The court will examine the intentions of the parties in all the circumstances, including whether any rent has been paid to the owner, to determine whether a periodic tenancy should be inferred. 4.1 What notice is required? If you have an express term as to the notice required, notice must be given in accordance with this, even if it is more or less than would usually be required by law. In the absence of a written tenancy agreement, a periodic tenancy will usually be for the same period as that in respect of which the rent is paid. Therefore if rent is paid annually, the periodic tenancy will be an annual tenancy. Unless the parties have agreed otherwise, the landlord must give at least six months' notice to terminate a yearly periodic tenancy, and the notice must expire at the end of the relevant yearly period 56 (being the anniversary of the expiry of the original lease 57 ). Where the period of the tenancy is less than yearly (because a weekly, monthly or quarterly rent is payable) the length of notice must correspond to the period of the tenancy 58. The notice must expire on a rent day. Where a periodic tenancy has 1954 Act protection, a single s25 notice can incorporate the requirements of the notice to quit or a separate notice to quit can be served. 4.2 What is the effect of a notice to quit? In the absence of an express term to the contrary, a periodic tenancy can be determined by a notice to quit given by either party. Once a valid notice to quit has been given the tenancy will automatically come to an end on the expiry of the notice; any waiver or withdrawal of it is ineffective and if the tenant continues in occupation a fresh tenancy arises 59. The notice to quit also has the effect of terminating any subtenancies created out of the tenancy Hyatt v Griffiths (1851) 17 QB Croft v Blay [1919] 2 Ch Doe d. Peacock v Raffan (1806) 6 Esp 4 59 Tayleur v Wildin (1868) LR 3 Ex Pennell v Payne [1995] QB

13 5. Break clauses 5.1 Nature of break clause A break is in the nature of an option and it operates to end the lease before the fixed term expires. This may be an unconditional right or subject to conditions set out in the lease. Options are always strictly construed and this is particularly important in respect of notice requirements, time limits and conditions for exercise of the option. Time will always be of the essence, unless the lease says otherwise Act protected tenancies The fact that a lease has 1954 Act protection has no effect on a tenant s break. However, where a landlord s option to break is in a protected lease, in addition to serving the break notice the landlord must also comply with the statutory procedure (see paragraph 2) on exercise of the break 62. Just a s25 notice could fulfil both roles, provided that any requirements as to service of the break notice are complied with Subleases If subleases have been granted out of the lease which is broken, these will also come to an end 64. This is probably the case even if the headlease was varied to introduce a break after the sublease was granted, though there s no case law on this. The subtenant would have a claim against the tenant for derogation from grant, and if the sublease had 1954 Act protection the subtenant will be able to apply for a renewal lease against the head landlord. 5.2 Who may exercise the break? A break right is exercised unilaterally and may be available to the landlord, the tenant or both. If the lease includes a break right but is silent as to who may exercise that right then only the tenant may exercise it 65. It may be drafted to be personal to the original tenant or it may also be available to its successors in title; unless the lease expresses the option as being personal to one particular party, it is exercisable by successors in title to the original parties 66. This is the case even if the lease does not define the landlord and tenant as including successors in title 67. Unless the lease says something different, then where there is more than one landlord or tenant party, eg joint tenants, the notice must be served by and on all parties, otherwise, the notice will be ineffective 68. Where a registered lease has been assigned, legal assignment takes place at registration, not completion 69. A right to break may be exercised by the person holding the legal estate, and not the beneficial owner (if different), so care should be taken to check that an assignment has been registered before a break is exercised. 5.3 When the break may be exercised A break clause may be drafted to give a rolling right (eg on 6 months notice at any time) or the right to break on one or more specified dates only Fixed date A fixed tenant's break is the most common type of break clause. The tenant will be able to break the lease on one or more dates during the term, sometimes at dates that are tied in some way to the rent review dates. 61 United Scientific Holdings v Burnley Borough Council [1978] AC Weinbergs Weatherproofs Ltd v Radcliffe Paper Mill Co Ltd [1958] Ch Aberdeen Steak Houses Group v Crown Estate Commissioners [1997] 2 EGLR Barrett v Morgan [2000] AC Dann v Spurrier (1803) 3 B & P Olympia and York Canary Wharf v Oil Property Investments [1994] 2 EGLR Re 120 Packington Street (1966) 110 Sol Jo Hounslow London Borough Council v Pilling [1993] 2 EGLR 59, Sutcliffe v Wardle (1890) 63 LT Brown & Root Technology v Sun Alliance [2001] Ch

14 One of the main considerations where there is a fixed date is apportionment of rent. If the break date is a rent payment date, or any date other than the final day of a rent period, and the break clause requires all payments to be up to date, all sums due on that date must have been paid in full in order to comply with this condition. Unless any provision is made to the contrary, this means that the full quarter s rent, not just the part due up to the break date, must have been paid 70. An apportioned amount of the rent paid will not be recoverable unless express provisions are included to permit this 71. If the break date is a rent payment date this in effect means that the tenant could end up paying for a full quarter s rent when he is not in occupation Rolling date Where there is a rolling break the party giving notice will usually just need to specify a break date which is eg no less than 6 months from the date of service of the notice. The lease should always be checked to see whether the break notice can be served immediately or only after a specified period of time has passed. 5.4 Serving the notice Whether the break is fixed or rolling, careful attention must be paid to the requirements of the lease when serving the notice. Because a break clause is in the nature of an option, time will be of the essence unless the lease says otherwise. This means that everything to do with serving the notice must be strictly adhered to. This includes: Period of notice The lease could require a fixed notice period (eg 6 months exactly) or the more flexible "not less than 6 months". Where there is any debate about the exact period of notice required to be served, it may be wise to serve 2 or even 3 notices, each without prejudice to the validity of the others, to cover all bases. Remember that if the notice is served even one day late it will be invalid 72. If you are trying to exercise a break clause which contains vague wording about the notice period you should check whether anything else within the lease or other documentation gives any indication as to the intention of the parties. In the absence of any clarification you should always err on the side of caution Form of notice It is essential that the notice is in the form specified in the lease. If a form of notice is annexed this must be used or the break will not be validly exercised. This also means that any wording specified in the lease must be included in the notice, no matter how redundant or irrelevant those words may be Party authorised to sign the notice If the lease states who may sign the break notice then this will override the common law rules on actual and ostensible authority. This means that, as long as the break notice is signed by whoever the lease says it should be signed by, that signatory has sufficient authority for the purpose of the break. Where there are joint tenants the break must be exercised by all of them unless the lease contains express authority for one (or more) to exercise it on behalf of them all 74. Where one (or more) joint tenant wishes to exercise the break on behalf of all of them, the lease should be checked to see whether this is permitted. Where the notice is being served by an agent, the existence and authority of the agency should be set out on the notice. 70 PCE Investors Ltd. v Cancer Research UK [2012] EWHC Marks and Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2014] EWCA Civ Quartermaine v Selby (1889) 5 TLR Friends Life Ltd v Siemens Hearing Instruments Ltd [2014] EWCA Civ Hounslow LBC v Pilling [1993] 2 EGLR

15 5.4.4 Method of service The relevant provisions as to service of the notice may be mandatory (service must be done in the specified way) or permissive (service may be done in the specified way). Where the provisions are mandatory the specified method must be used: depending on the wording the break may not be validly exercised if some other method is used, even if the notice is in fact received 75. Note that in the absence of an express provisions of this kind, general provisions (either the lease provisions or, if none, the provisions of section 196 Law of Property Act 1925) will apply Conditions Break conditions usually need to be satisfied as at the break date. However, the wording should be checked carefully as some clauses are drafted to require compliance with condition at the date of service. The conditions are strictly construed and even minor breaches can invalidate the break: these are considered in more detail at paragraph 5.5 below Problems with service 5.5 Break conditions If the lease prescribes a particular form of notice, this form must be used. However, if no particular form is prescribed, a minor defect will not necessarily invalidate the notice if the reasonable recipient, with knowledge of the factual and contextual background, will not be perplexed by the error 76. Generally a notice served by or on the wrong person will be invalid 77. However, if the landlord would not have been misled by the error it may be possible to save the notice 78. Where there is a mandatory method of service and that method is not complied with, because, for example, it is sent to the wrong address, the notice may be invalid even if it is in fact received Types of break condition Break conditions may be absolute or qualified. a) Absolute conditions An absolute condition will prevent the tenant from breaking the lease if there is a subsisting breach of covenant or condition at the relevant time no matter how trivial 80. For example, if the lease requires the property to be painted in the last year of the term and it is painted a few days before the beginning of the last year, the condition will not have been complied with and the tenant will be unable to exercise the break, despite the fact the damages for this breach would have been nominal 81. Note that if there has been a breach, but it has been remedied by the relevant time, the tenant will have complied and can exercise the break 82. b) Qualified conditions Alternatively the condition may be qualified by words such as reasonably, substantially or materially. Reasonable compliance requires the tenant to have behaved in a way that a reasonably minded tenant might well behave Orchard (Developments) Holdings Ltd v Reuters Ltd [2009] 1 EGLR Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC Lemmerbell Ltd v Britannia LAS Direct Ltd [1998] 48 EG Havant International Hioldings Ltd v Lionsgate (H) Investment Ltd [1999] EGCS Capital Land Holdings Ltd v Secretary of State for the Environment [1996] SCLR Friar v Grey (1850) 5 Ex Bairstow Eves (Securities) Ltd v Ripley [1992] 2 EGLR Bass Holdings Ltd v Morton Music Ltd [1988] 1 Ch Gardner v Blaxill [1960] 1 WLR

16 What this actually means in practice will depend on the facts of the particular case. Material and substantial are generally regarded as interchangeable and compliance is assessed by reference to the ability of the landlord to re-let or sell the property without delay or additional expense. It does not mean that the parties should be taken to have intended that minor breaches are permitted if these minor breaches have a significant impact on the ability to re-let or sell 84. Even a covenant which has been watered down by words such as reasonable or material can trip up the tenant as exactly what is reasonable or material will be different in every case. However, from a tenant s point of view a qualified covenant is clearly preferable to an absolute one Relevant time for compliance The date by which any break conditions need to be complied with could be the date of service of the break notice or the break date or both. This will depend on the construction of the break clause and needs to be checked to ensure compliance Examples of break conditions Common provisions which a landlord may try to include are the payment of sums due, vacant possession and compliance with repair covenants. Where these conditions are absolute, any subsisting breach, no matter how trivial, will prevent the tenant from exercising the break. a) Payment of sums due Care must be taken to check which payments are due in order to effectively exercise the break. The condition may require all payments due as at the break date to have been made in order for the break to be effective. Alternatively, the condition may be restricted just to the main rent or the main rent and the service charge. Basic rent If the fixed break date falls on a rent payment day or any other day that is not the final day of a rent period and the break clause requires the basic rent to be up to date then the full quarter's rent must be paid, not just the part due up to the break date 85. If the break date falls on any other day the lease should be checked to see whether it provides for: (i) the rent to be paid only up to and including the break date; or (ii) for a refund of rent paid in advance in respect of any period following the break date. All payments due If a break clause requires the tenant to make all payments due under the lease by the break date, this may include default interest on late payments, even if the landlord has not issued any demand for such interest 86. Disputed sums Great care must be taken with regards to disputed or queried sums. Unless disputed sums are not part of the condition, failure to pay a disputed amount is a failure to pay a sum due and invalidates the break. It may be necessary for a tenant to pay any outstanding sums due on a without prejudice basis and argue about them later. For a large tenant with a number of premises the accounts department should be instructed to pay all sums demanded in respect of the relevant premises, even if they may normally have queried them, as the failure to pay even a small amount may invalidate the break. 84 Fitzroy House Epworth Steet (No 1) Ltd v The Financial Times Ltd [2006] EWCA Civ PCE Investors Ltd v Cancer Research UK [2012] EWHC Avocet Industrial Estates LLP v Merol and another [2011] EWHC 3422 (Ch) -13-

17 b) Vacant possession A condition that vacant possession is given at the break date is often included by the landlord. The principle of vacant possession is that the premises must not contain a substantial physical impediment to their use by the landlord 87. The requirement of vacant possession means that the property must be empty of people and that the landlord is able to assume and enjoy immediate and exclusive possession, occupation and control of it. The property must also be empty of chattels, although the obligation in this respect is likely only to be breached if any chattels left in the property substantially prevent or interfere with the enjoyment of the right of possession of a substantial part of the property 88. c) Repair and decoration If the lease contains a general condition requiring compliance with all tenant s covenants this is highly onerous for the tenant and means the break is likely to be almost impossible to exercise effectively as a failure to comply with the condition in some very minor respect will invalidate the break 89. If the condition is worded so that any material breach must be remedied then the tenant may need to have its own survey done in order to ascertain exactly what work needs to be carried out and then ensure that this work has been done before the break date. The tenant may be able to persuade the landlord to confirm in advance of the break date that the condition has been complied with. Alternatively, the landlord may be willing to enter into a financial settlement in return for a waiver of this condition. However, unless the provision requires it, the landlord is under no obligation to do any of these things and a landlord who wants to prevent the break from taking place is unlikely to agree to this. Attention must be given to any notice periods for the landlord to serve notice and the tenant to do any required works. For example, if time is not of the essence in relation to the service of a landlord s notice of repairs then the landlord would be able to serve a notice a week before the break date and the tenant s failure to comply would invalidate the break. The lease should be checked to ensure that each party is aware of its obligations Waiving compliance with conditions Either party may waive a requirement to comply with a condition. The waiver may be made in writing, or orally, or inferred by conduct. Waiver by a landlord may occur where he accepts possession following a purported exercise of a break. However, there will be no waiver until the landlord knows all of the material facts, knows that he has a right to choose between waiving or not and knows the legal effect of each choice 90. If the landlord does want to dispute the tenant s right to break, he should not do anything which may amount to a waiver. If he (or his agents) has to accept keys or take security measures as a requirement of the insurance policy, this should be done only and expressly on a without prejudice basis. 5.6 Practical issues for a tenant exercising a break Before service of the notice Check whether there are any conditions which need to be complied with as at the date the notice is served. 87 Legal & General Assurance Society Ltd v Expeditors International (UK) Ltd [2006] L & TR NYK Logistics (UK) Ltd v Ibrend Estates BV [2011] EWCA Civ Bairstow Eves (Securities) Ltd v Ripley [1992] 2 EGLR HB Property v Secretary of State for the Environment [1998] L&TR