Taking a break... time for both Landlords and Tenants to wake up and smell the coffee?

High street landlords are under pressure as a result of the recession in the commercial property market. The failure of well known high street names such as Coffee Republic and Zavi - not to mention Woolworth last year - has lowered market confidence.

Starbucks is reported to be planning to close 50 of its loss making cafes unless landlords agree to a cut in rent. Landlords whilst keen to protect cash flow and avoid the additional pitfall of empty rates may also be suspicious that tenants are just taking advantage of the economic slowdown in pleading poverty. In such cases, they are best advised to insist on seeing hard evidence of a fall in income before agreeing to any discounting of the rent. Any agreement to reduce the rent must be properly documented to avoid a permanent variation of the lease or any other unintended consequences.

Business tenants having the benefit of a break clause in their lease may decide either to vacate the premises early or alternatively seek to renegotiate the rent to a more affordable figure.

Both landlord and tenant need to be aware of problems that can arise from either serving break notices incorrectly or not covering other issues on surrender of the tenancy. The break notice must be served strictly in accordance with the specific requirements of the lease otherwise the notice is likely to be invalid. Landlords should take care not to be deemed to have accepted the ending of the lease by their actions such as accepting the keys or redecorating the premises. Tenants should ensure that before a notice to break is served all of the tenant's obligations in the lease have been complied with, especially in respect of the payment of rent, service charges and the undertaking of repairs. Otherwise the break notice will be invalid.

Landlords, if they cannot prevent the operation of the break right, should consider a number of issues. If a new lease is granted any pre-existing guarantor will probably be released and the landlord may need to reconsider the covenant strength of the tenant. If the previous lease was granted before 1 January 1996, the landlord will lose the benefit of a right of action against former tenants. Where the previous lease was contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954 so that the tenant has no right to remain in occupation after the expiry of the lease the ‘new' lease will not be contracted out unless the landlord observes the relevant statutory process.

In practice, it may be wiser for the tenants wishing to use a break clause to renegotiate the terms of its lease to consider approaching the landlord well in advance of the key dates and using the threat of the break clause as a negotiating tool, rather than actually exercising the break.

Published: 22 October 2009             Author: Nick Dell, Head of Commercial Property