Mutual break clauses – are they worthwhile from a landlord’s perspective?
By Real Estate Associate Solicitor, Amanda Byrnes.
When negotiating a new lease, a usual provision that a tenant will seek to include, particularly those embarking on a new business venture, is a break clause, i.e. a date or dates on which the tenant may terminate the lease before the end of the contractual term. In an attempt to get the landlord on board, a suggested concession that the break be mutual may be broached, thereby allowing either party to terminate the lease on the earlier date by giving the other party an agreed period of notice.
At first glance this proposal may seem like a fair bargain, but are the positions of the parties really equal? Provided that the lease in question is protected by the Business Tenancies Order (N.I.) 1996 (“the BTO”), which will be the case for the majority of commercial leases, the answer will be a firm no.
From the tenant’s perspective, should it wish to exercise the ability to break, it need only ensure that the stipulated procedure and any conditionality attached to the break (such as giving up vacant possession or ensuring all rent is paid up to date) is complied with. The position for the landlord however is not so straightforward. If the landlord wishes to exercise its option to break, it must not only comply with its obligations under the lease, but more importantly, ensure that it can satisfy the exacting requirements under the BTO.
What does BTO protection mean for the landlord break?
In order for a landlord to validly determine a protected tenancy, it must satisfy one or more of the specific grounds as set out in Article 12 of the BTO and must specify the applicable ground(s) in the notice informing the tenant of its decision to bring the tenancy to an end (known as a “Notice to Determine”). These grounds are as follows (in brief):
- The tenant failing to comply with the repair and maintenance obligations under the lease;
- A persistent delay in the tenant paying rent;
- The tenant has substantially breached the covenants of the lease;
- The landlord is willing to offer suitable, alternative accommodation to the tenant;
- In the instance of the tenant letting part only of a property, if the rent obtainable by the landlord would be substantially greater if the property was let as a whole;
- The landlord intends to demolish or carry out substantial works to the premises; and
- The landlord requires possession of the premises for its own use.
- Where the premises are comprised in the tenancy of an estate acquired by a public authority and possession of the premises is reasonably necessary for the public authority to carry out its functions under any statutory provision or rule of law (the “grounds”)
As touched on previously, when a landlord receives the tenant’s option to break, provided it has been served in accordance with the terms of the lease, the landlord will be contractually obligated to accept it. On receiving the said Notice to Determine however, should the tenant wish to remain in the premises, it can lodge a tenancy application for the grant of a new lease with the Lands Tribunal to contest the ground(s) on which the landlord is relying and has the ability to do so right up to the proposed determination date specified on the Notice.
If the landlord is not willing to offer a new lease then negotiations between the parties will ensue. If the parties cannot come to an agreement through the course of the said negotiations, then the matter will go to the Lands Tribunal for decision.
Although matters frequently conclude before this stage, it is advisable for a landlord to appreciate that matters can progress to the Lands Tribunal should the tenant refute the grounds relied on. Therefore, in order to prove successful, the landlord will have to produce sufficient evidence in support of the said grounds on which it is relying to remove the tenant.
Does a landlord break have value?
In effect, what the landlord’s break does, is simply to offer an earlier date on which the landlord can seek to rely on the grounds as set out in the BTO. It should be remembered that this is the same process by which the landlord must comply, should it wish to remove the tenant at the expiry of the contractual term. If it cannot satisfy same, either on the date of the break or at the expiry of the term, the landlord will be under a legislative obligation to grant new lease to the tenant.
Although there are significantly more hoops for the landlord to jump through, when compared to the tenant should it seek to break the lease, this is not to say that there isn’t some commercial value to the inclusion of a landlord or mutual break clause. For example, should the landlord consider that there may be scope to develop a property in the relatively near future but does not wish to jeopardise the opportunity to agree a longer fixed term lease with a new tenant, a landlord or mutual break will be a useful option. As is the usual position, the landlord will have to consider its position and place the appropriate weight on the inclusion of such a provision based on its future intentions.
Should you wish to discuss any points raised within this article or should you require any further information on this topic generally, please contact a member of the Real Estate team at Tughans.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.