Commercial Property News

The Essence of Time - Break Clauses and Rent Review Clauses in Commercial Leases - Mike Read

If you are a landlord or a tenant of commercial premises with a lease term of five years or more then there is every likelihood that the lease will contain a rent review clause and possibly also a break clause. The rent review clause will normally stipulate that the rent payable under the lease will be reviewed, usually every three or five years during the term of the lease depending upon its length. If there is a break clause then it may commonly provide that the lease term can be broken, possibly to coincide with the rent review, or there may just be one single break option exercisable perhaps one or two years after the commencement date of the lease.

Whether there is a rent review clause or a break clause or both, the lease should also contain the mechanism by which the rent review or the right to break can be exercised and in the case of the break clause it will also stipulate whether the option to break can be exercised by the tenant or whether it is a mutual break clause that can also be exercised by either the tenant or the landlord.

It is not the purpose of this article to discuss the appropriateness or otherwise of a rent review clause or break clause to any particular lease but to remind both landlords and tenants of the importance of understanding how the rent review or break clause will operate and, in particular, to establish and to record any relevant time constraints which might apply, particularly where the terms of the lease specifically provide that time is to be "of the essence". A clause in any agreement specifying that time is "of the essence" is normally included where performance by a certain date is important to ensure that relevant deadlines are strictly complied with. Where time is "of the essence" in relation to the exercise of a particular right, for example, the right to break a lease then failure to exercise that right within the stipulated time limit will mean that the right is lost.

Dealing firstly with rent reviews, it is now common in most modern leases for landlords to provide that time is not to be deemed "of the essence." This is because if, for example, a lease stipulates that time is "of the essence" and that a landlord must serve a tenant with a rent review notice no later than six months prior to the rent review date then if the landlord fails to do so, the opportunity for the landlord to increase the rent will have been lost, at least until the next rent review arises which may not be for another five years. Therefore by stipulating in the rent review clause that time is specifically not "of the essence" a landlord who overlooks a rent review can still initiate the rent review procedure perhaps weeks or even months after the review date, as stipulated in the lease, has passed by.

Tenants, on the other hand, need to ensure that whilst a lease may stipulate that time is not "of the essence" so far as the landlord's initial rent review notice is concerned it may be deemed to be "of the essence" as regards time for service of the tenant's own counter notice. So, for example, if the lease stipulates that following receipt of the landlords rent review notice the tenant must issue a counter notice within say, 28 days and that time is "of the essence" then a tenant who fails to comply will be deemed to have accepted the increased rent as set out in the rent review notice even though that reviewed rent may be well above the actual market rent at the time of the review. It is very important therefore that both landlord and tenant are aware of exactly how the rent review procedure will operate and whether or not they need to be making diary reminders, possibly three or five years ahead of time, in order to ensure that they comply with any time limits imposed by the rent review clause which are specifically expressed as being "of the essence".

So the position with regard to the rent review clause is that time is invariably expressed to be not "of the essence" whereas with a break clause the position is usually quite the reverse and time will, more often than not, be expressed to be "of the essence" and time limits must therefore be strictly complied with. If a break notice is served even one day after the time stipulated in the lease then it will be invalid and the right to exercise the break whether by the landlord or by the tenant, will have been lost. It is quite common for a break clause to stipulate that the party exercising it must serve notice on the other party "not less than six months before the break date". Many tenants might well be aware that they have the right to break their lease on a say, the third anniversary of the commencement date of the lease, but may overlook entirely the fact that they actually need to serve the break notice on the landlord no later than two years and six months from the commencement date of the lease.

The party wishing to exercise the break therefore needs to have a forward diary reminder, giving them at least three months before the latest date upon which the break can be exercised to make an informed decision as to whether or not the break should be exercised and then to make arrangements for the break notice to be served and preferably leaving ample time for it to be re-served should the need arise. It is also important to check the lease to establish exactly where the break notice should be sent. Some leases will, for example, stipulate that any notice should be served at the landlords "usual place of business" whereas other leases may stipulate that a notice should be served on the landlord's registered office. Failure to serve at the right address may again prove fatal to the operation of the break notice.

If you are a landlord or a tenant and you are aware that either a rent review or an option to break is likely to be arising within the next 12 months then now is the time to be checking the terms of your lease to ensure that you fully understand the mechanics of the rent review procedure or the conditions applying to the option to break and, in particular, to establish whether any time limits imposed are stated to be "of the essence" or not. If you are unsure as to the provisions of your particular lease or if there is any ambiguity with regard to the wording of any of these provisions then the Business & Property Services Department of Lees Solicitors LLP will be happy to advise on the interpretation and practical implementation of these important provisions for both landlord and tenant alike.

Mike Read
Principle
Business & Property Services Department

This article provides a summary of a recent case/change in law/news item. It is intended for general information purposes only and is not to be relied upon. It does not constitute legal advice and should not be treated under any circumstances as a substitute for legal advice. Lees Solicitors LLP does not accept any responsibility for any loss that may arise from reliance upon the information contained within this article. The copyright in this article is owned by Lees Solicitors LLP and permission must be sought before reproduction or publishing.

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