Landlord & Tenant

Leases - re-gearing and negotiations

One by-product of the Recession is that lease re-gearings and extensions have become increasingly popular. For example, if a tenant occupies offices on a twenty year lease from 1999 with a break clause at the expiration of year 10 and the normal five yearly upward rent review pattern, the rent agreed at review in 2004 could well be higher than the market rent for the offices as the 2009 review approaches. The typical rent review clause will not allow the rent on review to decrease, so the premises will as a result be over-rented.

In that situation, the tenant might want to exercise its break option - but it might also be persuaded to surrender that break option in return for a reduction in the level of the existing rent. From the landlord’s point of view, the removal of the break clause will guarantee income for the remaining ten years of the lease term. Further, the Landlord might be able, as part of the negotiation, to persuade the tenant to agree a lease extension for a further five years.

A word of warning, however: If a Landlord does manage to re-negotiate and re-gear with his tenant, then the matter will very likely be documented as a formal Surrender of the existing lease and a simultaneous grant of a new one. The effect of a Surrender will mean that both parties are released from any prior breach of covenant.

Break clauses – a reminder

In the current climate, Tenants are freely exercising options to terminate their leases.- but if they do, both parties must remember to look carefully at the wording of the clause itself .

The break clause will state who can exercise the break, eg. is it personal to the original tenant only, or is it exercisable by whoever is the tenant at the time. The clause will also set out when the break can be exercised, and how the tenant is to exercise the break-normally notice must be given in writing to the Landlord.

Many break clauses have other preconditions with which the Tenant has to comply; for example, the Tenant may have to “reasonably” or “materially” or “substantially” comply with its covenants.

The Courts have held that “reasonable” compliance on the part of the tenant means that the tenant must have behaved during the tenancy in such a way that a reasonably minded tenant might behave. As regards “material”, the test is an objective one and “materiality” has to be judged by the ability of the landlord to re-let or sell the property without delay or additional expense.

One final point for tenants to remember is that break clauses typically require as a pre-condition that all rent, service charge etc be paid in accordance with the terms of the Lease. As the Lease will normally provide for rent, service charge and insurance to be paid in advance, the tenant must pay those monies in advance, even if they relate to a period beyond the break date. For example, if the break date falls between the usual rent payment quarter days, a tenant might make the mistake of apportioning and paying only up to the break date. This failure to pay the entire rent due to the next quarter day could well invalidate the break clause. If in doubt, request a statement from the Landlord of the monies it regards as due – though the Landlord is probably not obliged to co-operate by providing one.