Give the landlord a break?

Although not as common as a tenant requesting an option to break, a landlord may also want a new lease to include an option to end the tenancy early. This may be because they are looking to occupy the property themselves, planning to redevelop, thinking about selling their freehold interest where the inclusion of a landlord’s option to break may increase marketability, or they simply want to keep their options open.

Whatever the reason for wanting to negotiate a break option, it is just as important for landlords to consider issues that may arise and in particular how an option to break may interact with the tenant’s right to remain in occupation.

Under the Landlord and Tenant Act 1954, tenants have the right to remain in occupation and request a new lease for business premises. This will still apply even if the landlord has an option to break the lease, unless these rights have been specifically excluded. This means that whilst the landlord can serve notice under the break clause to end the lease, the tenant can respond by claiming statutory rights to remain in the property and be granted a new lease.

Therefore, if the landlord wants to exercise the break, they will also need to serve notices under the 1954 Act to end the tenancy, at the same time. This notice can only be based on one of the limited grounds contained in the Act, such as wanting to occupy it themselves, planning to redevelop the property or because the tenant is in breach of its obligations. The landlord cannot bring the lease to an end, simply because it has a better offer on the table.

As a tenant could oppose any notice and apply to the courts for a new lease, the overall outcome may ultimately depend on the evidence that can be produced by landlord and tenant and the discretion of the court.

As a result if the 1954 Act protections are not excluded when there is a landlord option to break:

• it cannot be guaranteed that the landlord would get possession of the property at the break
• the break clause may be useless to any buyer of the freehold who wishes to occupy itself, as this ground may not be relied upon if the landlord has not been the landlord for five years or more
• dealing with the 1954 Act procedures adds an extra administrative burden and can become very costly and protracted if the matter goes to court
• if the landlord succeeds in obtaining possession then they may have to pay compensation to the vacating tenant. This can be one or two times the rateable value of the property, so may be a substantial sum.

When looking to include a landlord option to break, it is very important that landlords address the issue of the 1954 Act protections and whether these should be excluded from the lease, before agreeing the heads of term with the tenant.

A tenant may resist excluding the 1954 Act protections, particularly if the lease is longer than five years, in which case the landlord will need to consider if the break is really worth including, or accept that successfully operating the break in the future may be a difficult task.