Break Clause Conditionality – Marchmont Recommend Continued Caution

This trend is evidenced by the MSCI’s Lease Events Review 2016 showing that almost 50% of retail leases across all retail sectors had a break clause in them. As Tenant advisors, Marchmont have always been cautious of conditions and penalties included as part of a Tenant break clause as these require observance, to trigger any break clause. Indeed Case Law and experience has shown that break clauses are often frustrated and indeed prevented from operating, as a consequence of the conditionality contained within the break clause, making the initial effort and cost of securing a break clause, worthless.

As we are all aware, The Code for Leasing Business Premises 2007 has in recent times given Tenant’s a measure of recourse and compromise, where landlords have been pushing for unfavourable conditionality. Recent case law has thrown up new challenges and concerns for Tenant’s wishing to use what they thought were useable break clauses.

One common condition to satisfy at a break clause is the giving up of the unit with vacant possession. The 2016 case: Riverside Park Ltd vs NHS Property Services Ltd EWHC 1313(Ch), raises the daunting prospect that any demountable partitions introduced by the Tenant during the term will need to be removed prior to the break clause, to satisfy strictly a vacant possession requirement.

Demountable non-structural partitions as the judge held that the demountable partitioning was not a fixture that could be left at the break date but a chattel as it was not affixed to the structure, so it could be removed without substantial damage to the premises and had only ever been included as a temporary benefit for the current Tenant.

It doesn’t need Marchmont to sound the alarm for most Tenant’s, who in vacating premises at a break date, would rather forgo the immediate cost and aggro of this removal, which can be left to the more stable arena of Terminal Dilapidation negotiations. Retailers will, with horror realise that if demountable partitions need to be removed, then closure dates will need to come forward significantly, again bringing further cost and organisational hassle, let alone the loss of profit from fewer trading days.

Of course, the Riverside Park case is not binding in all or indeed most circumstances as it relied on its own particular details, which in this case revolved around a breach by the particular Tenant of conditions imposed within a licence to alter but………it could herald a new attitude and an updated legal and landlord interpretation of the principle of leaving demountable partitions on site.

At the very least, any Tenant considering utilising a break clause with a Vacant Possession condition should consider that on removing Tenant fittings, some pre-thought may be needed for demountable partitions and thus the costs and timings of the same should be factored in.

Marchmont’s own experience acting for Clients has been a recent legal opinion that “if in doubt strip it out” but we are not convinced this safety-first approach is the best strategy.

With a significant amount of ‘shutting the stable door after the horse has bolted’, perhaps going forwards a better strategy would now be shorter leases at Renewal or acquisition rather than incorporating break clauses or negotiating at acquisition / renewal what Vacant Possession works should be undertaken as a condition of the break – so all parties at the commencement of the lease understand the rules.

Of course these wise words and advice, clearly don’t help us all dealing with the significant number of break clauses out there, which will need to be considered and dealt with on a bespoke basis.