It is increasingly common for leases to contain a right on the part of the tenant to terminate the lease and in recent years many tenants have been using those rights either to bring their leases to an end or as a negotiating tactic to renegotiate a new lease either at a lower rent or on otherwise more favourable terms when the tenant had no intention of leaving.
In addition to the inherent problems of exercising poorly negotiated break clauses, which contain onerous conditions (which are explained in detail in my book “A Tenant’s Practical Guide to Commercial Leases”), a tenant may face equally troubling issues when serving a break notice for tactical advantage. The closer it gets to the break date, without any binding agreement by the landlord to new favourable terms, the less certain things become for the tenant and the more the advantage swings in favour of the Landlord as the tenant begins to face the very real prospect that they may have to vacate.
All this is relatively old news but things are not necessarily straight forward (and costly legal issues may also arise), even where the landlord and tenant agree new terms for the tenant to stay on.
The issue is that once a break notice is validly served it cannot be withdrawn by the tenant. The very fact it is validly served, even though the break date has not passed, sets the clock running to end the lease on the break date.
It is likely that terms for continued occupation will not be agreed until relatively close to the break date as the parties seek to push each other to gain the most advantage. However, once those terms are agreed this leaves the issue of what to do to put the new occupational arrangement in place and document the terms agreed in a short time.
None of the obvious quick solutions will have any successful outcome:-
- Withdrawal by agreement- it is clear that even where the landlord and tenant agree that the break notice is withdrawn it will not act to prevent termination of the lease. The issue is that the law provides that even though two parties can agree that a break notice is to be treated as withdrawn, the very act of making that agreement brings the current lease to an end on the break date and a new lease impliedly arises. This will give rise to a variety of problems, not least the uncertainty upon what terms the new lease will arise. Additional issues for the landlord are that the “implied” lease will be within the 1954 Act and any rent deposit will be released. Stamp Duty Land Tax will not be due on the implied lease by way of special exemption.
- Vary the existing lease to record the new terms agreed- clearly the old lease cannot be varied to record the new terms as whether or not the parties agree the break notice is withdrawn the old lease will end on the break date. In theory it may be possible to document agreement to withdrawal of the notice and then agree on what terms the ”implied” lease arises but it would be far simpler to grant a new lease before the break date. The implied lease route contains uncertainty for all and is therefore probably unpalatable for that reason.
- Vary the existing lease to remove the break- once a break notice is served the break is set in motion and effectively cannot be stopped. It is not possible to vary the existing lease before the break date to remove the break as the lease will never the less end on the break date.
- Fail to comply with break conditions to avoid an effective break- this is a neat idea but very risky for both parties due to the uncertainty involved and the requirement of the co-operation of both parties. Most breaks (but not all) contain conditions to be fulfilled before the break is effective. It is therefore technically possible to deliberately fail to fulfil those break conditions so that the break has not been validly exercised. The issue is that some well negotiated breaks do not contain break conditions, and so this would not apply, and in any event it is open for the landlord to waive compliance with any conditions and treat the lease as at an end. From the landlord’s point of view until the break date has passed it is of course still open for the tenant to comply with the break conditions and treat the lease as at an end. It is probably taking things too far to document both parties’ promise to deliberately fail to comply with the break conditions and is most likely too artificial. Any such agreement could certainly be in danger of invoking the “implied” lease and the termination of the old lease (as above).
Therefore, the only option is for the parties to enter into new lease (unless the extended period of occupation will be short or temporary when a license may be more appropriate). The two main issues with this solution are that they can take time to negotiate and Stamp Duty Land Tax may be payable.
If the parties are happy to use a lease by reference to the old lease, or a lease in the same form, this should accelerate agreement of the lease. In terms of the stamp duty land tax liability, overlap relief could be available in certain circumstances although the following should be noted:
- Overlap relief is only available where the old lease was granted on or after 1 December 2003 or was granted pursuant to an agreement for lease dated on or after that date.
- It is only available if the new lease is for the same or substantially the same premises as were demised under the old lease; but
- It is only available if the old lease is surrendered as consideration for the grant of the new lease. This may be affected by operation of law, where the grant of the new lease (provided the extent of the premises is the same) will act as an automatic surrender of the old lease. On that basis it is essential that this surrender and re-grant occurs before the break date and before the break is effective as otherwise there will not have been a surrender and the relief may not apply.
- The relief is calculated by deducting the basic rent paid each year under the old lease (on which Stamp Duty Land Tax was actually paid) from the basic rent payable each year under the new lease in respect of the period from the date of the grant of the new lease until the date the contractual term of the old lease would have expired. This does mean that Stamp Duty Land Tax will still be due on any excess. For example,
- Lease A is granted at a basic rent of £100,000 p.a for a term from 1.4.2010 and expiring on 31.3.2020;
- The surrender of Lease A occurs at midnight on 31.3.2015;
- Lease B is granted for a term of 10 years from 1.4.2015 at a rent of £150,000 p.a
- Stamp Duty Land Tax will be due on the reduced basic rent of £50,000 p.a for the period from 1.4.2015 to 31.3.2020 (£150,000 – £100,000) and on the full rent of £150,000 for the period from 1.4.2020. Essentially, the basic rent on which Stamp Duty Land Tax is calculated is reduced for the overlap period (1.4.2015 to 31.3.2020) as Stamp Duty Land Tax has already been paid on the overlapping amount under Lease A when to it was originally granted.
In short, once a break notice is served it cannot be withdrawn by the tenant and even withdrawal with the consent of the other party will not prevent the lease from coming to an end on the break date. Where substantial continued occupation is agreed the only solution is to enter into a new lease before the break date in order to claim overlap relief on the stamp duty liability.
Stuart Darlington, Partner, Michael Simkins LLP