Operating from a site on a lease basis, rather than owning it outright, makes good business sense for franchise holders. Negotiating flexible lease terms enables an operator to respond quickly and easily to market conditions, or even the loss of a franchise. However, a recent case illustrates that care and proper planning are needed to ensure that a quick getaway can be achieved.
Sirhowy Investments Ltd v Henderson and Another related to a second-hand car business. The planning permission for the site was subject to the local authority’s approval to access arrangements to the site to enable car transporters to unload cars. Because these had not been finalised at the time that the tenant took his lease of the site, the parties agreed to allow the tenant the right to break the lease if such agreement on access couldn’t be finalised. Crucially, however, the clause also required that in order for the tenant to exercise the break right successfully it must also "have paid the rent and observed and performed the covenants contained in this lease".
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Three years into the lease the council served a notice to the effect that the tenant had not complied with the access condition. After further unsuccessful attempts to negotiate a settlement of this point the tenant finally served notice on the landlord to exercise the break.
The court accepted that the tenant had given notice in accordance with the lease terms and that it had also made reasonable efforts to resolve the access issue. However, it went on to say that the tenant’s attempt to break the lease was unsuccessful because it had not complied with the other lease covenants. Specifically, one of the covenants related to keeping the property in "good and substantial repair". As it transpired, a couple of sections of the fencing at the property had been damaged and patch-repaired with sheeting rather than being replaced with new fencing. Though this might seem trivial to most, the court decided that it had no scope to act reasonably or fairly in interpreting the lease clause. The clause was drafted in absolute terms so that any non-compliance, however slight, meant that the break failed. This meant that the lease was treated as continuing, with the rent and other obligations remaining in full force and effect.
So when considering when and if to exercise a break right bear in mind the following:
- Plan well ahead – break rights generally require fairly lengthy notice to be given. This needs to be taken into account with any planned relocation.
- Read any conditions attaching to the right very carefully. Always take professional advice on what the conditions mean and what is needed to comply with them. Again this affects both the cost of compliance and the time needed to ensure any preconditions can be met.
- Never assume something in the break right is trivial, or that you can negotiate it away. Landlords may agree to break rights at the start of a lease, but are often reluctant to let tenants out of their obligations years down the track, particularly if it may be difficult to relet the unit or rents are falling. If they can find the smallest chink to keep the tenant on the hook, they will certainly use it.
Remember that the cost of seeking early professional advice on lease break rights will outweigh the business and financial risks of going it alone – and getting it wrong.
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By GlobalDataMelissa Loucas is a partner at Birketts LLP
