Legal advice: Making a clean break

A look at leases and the problems that can come with terminating them.

By Keith Miller of thePublican.com's team of legal experts from London solicitors Joelson Wilson.​

A few months ago we looked at a business tenant's right to bring a lease to an end and considered the dangers where the lease imposes prior conditions which must be satisfied if the right is to remain valid and exercisable.

A recent court case has highlighted this problem for tenants. The Financial Times (FT) had a lease on an office building in the City, paying an annual rent of £595,000. It had the right to terminate the lease in 2004 and gave the necessary written notice to do so. The wording of the break clause in the lease was relatively mild compared with some examples, just saying that the FT had to have "materially complied with all its obligations" under the lease down to the day when the lease was to end.

The FT knew it had to do considerable work to put the building into good repair, so in good time it appointed a surveyor to check its condition and draw up a list of necessary repairs. It tried to arrange a meeting with the landlord's surveyor, but he ignored them and independently prepared his own schedule of works.

According to the judge, the surveyor saw his role as seeking to identify as many defects as possible, so as to enable his clients to hold the FT to the lease, as it was not in the landlord's financial interest to allow the lease to be terminated. With time passing, the FT went ahead with the works, which took 10 weeks to complete and cost over £900,000, but were finished before the termination date. The FT then regarded the lease as at an end.

The landlord did not. It went to court to claim unpaid rent and service charges for the following quarterly periods, saying the tenant was still liable. It had also served a notice calling for a rent review, as a review date provided for in the lease had gone by. Its claim was that the FT had not "materially" complied with their lease obligations, as there were still repairs to be carried out to the building.

The judge was not impressed by the behaviour of the landlord or the surveyor. He decided that the only outstanding repairs were relatively minor and would not prevent the landlord from re-letting the building or offering a substantial rent-free period to a new tenant.

Therefore, the FT had materially complied with its obligations and the break was effective.

If he had decided otherwise, the FT would have been on the hook for another six years, paying a high level of rent and service charge, even though it had vacated the building.

So the moral is to argue against any preconditions in a break clause. If you have to accept a "materially comply" condition, make sure that, when you exercise the right, you give the landlords no room to claim that you are in breach and that the lease is still in force.