Tenant break options in commercial leases within Scotland

Tenant break options are common in commercial leases, allowing tenants to end a lease early, subject to the tenant giving notice to the landlord.  These options have long been a feature of commercial leases but recently a practical issue concerning payment of rent is now the subject of an appeal to the UK’s highest court, the Supreme Court.

The practical problem is this: if a tenant break option is to take effect on, say, 1 September but the tenant is required under the lease to pay rent for the period 28 August to 27 November, is the tenant allowed to pay only 5 days’ rent to 1 September rather than the 91 days’ rent to 27 November?  The answer may seem obvious – that, because the tenant would only receive the benefit of 5 days’ occupation, the tenant should only pay 5 days’ rent for the period to 1 September.  Many landlords and tenants (at least in our experience) follow this practice.

In the 2014 English Court of Appeal decision of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd, (and one very likely to be followed in Scottish law), it was decided that a tenant attempting to exercise a break option should have paid rent through to the end of the rent payment period – i.e. to use our example, through to 27 November.  Because, however, the tenant had apportioned rent as at the date of exercise of the break notice, the tenant had not complied with the terms of the lease.  Worse, because the lease said that the tenant could exercise the break only if the tenant had fully complied with the lease, the Court of Appeal held that the tenant break notice was ineffective.  The consequence was that the lease would run for the full period of the lease.

Although this might seem highly unfair to a tenant, there is logic to the Court’s decision.  Often – but not always – a tenant may be required to make a payment to the landlord in exchange for being allowed to exercise a tenant break clause.  Where the lease is silent – as in the case in question – it is not clear whether the landlord was or was not expected to receive a payment in the form of rent for the full rent payment period (i.e. for the 91 days rather than the 5 days used in our example).

The lesson here is that a tenant must check very carefully the terms of the lease and, if necessary, pay the full rent due for the rent period, even if this means that the tenant ends up paying irrecoverable rent beyond the date when the break takes effect.

The Supreme Court is expected later this year or early next to reach a decision on this issue – and its ruling is likely to be applicable to leases in both England and Scotland.

However, there remain other cases where courts have decided that a tenant was not entitled to break a lease, even though the notice itself was validly  given to the landlord.  In the case of Avocet Industrial Estates LLP v Merol Limited (2012) the tenant tried to exercise a break option.  The break option was, however, conditional on the tenant making payment of all monies due under the lease.  In this case, the tenant had a history of late payment of rent and the lease required the tenant to pay interest on late payment.  Even though the landlord had never asked for payment of interest, because the tenant had not paid interest, the Court decided that there were outstanding payments due under the lease and the tenant’s break option was held not to be valid.  In another case, Canonical UK Ltd v TST Milbank LLC (2012) the tenant had taken care to pay rent for the full rent payment period but inadvertently overlooked another clause in the lease and its attempt to break the lease was held to be ineffective.

The lessons from the above are clear:

  • when first entering into lease, your solicitor should pay close attention to the wording of the tenant break option – is it conditional or not on payments or compliance with other clauses in the lease?
  • if the break clause is conditional, the tenant needs to take the greatest care to comply fully with the break option conditions or the break option will not be valid
  • as a related point, where the tenant wants the landlord to treat a rent deposit as the equivalent to payment of the last instalment of rent, the tenant must get the landlord’s express written consent in advance for this

There are other considerations when drafting or exercising tenant break options.  If you need assistance with these points, please contact us and we will be happy to help.

Michael Dewar, Commercial Property Partner

CCW Linlithgow 10k update and competition

As we mentioned last month, the CCW Linlithgow 10k and Fun Run are taking place on 20 September 2015 and both are now open for entries. What better way to start the new term than with a new fitness goal which is also part of a great community event! Click here to enter.

We introduced you to our 10k runners last month, but Team CCW doesn’t stop there. We have a team of volunteers who will be marshalling and helping out in the finish area, as well as several CCW kids running in the Junior Fun Run. Together we are Team CCW and we are hoping to raise some funds for MS Society. Click here to sponsor us.

Back to School: Laying the Foundations

The summer (or the rather dreary excuse for a summer) is drawing to a close and the time of year has come around where parents around the country are heaving a sigh of relief – it’s back to school time! From these first crucial years of our lives, we have learned the building blocks of our education and skills. The importance of learning the basics cannot be overlooked, they are essential in everything that we do. The same goes for property law, whether you are buying or selling a house, a business or taking a lease – if you get the basics wrong, then you have a recipe for disaster.

Buying a Property

One example which sounds fairly obvious is making sure that you know what you are buying. Whether it is a building or a piece of land, it is essential that you check that the plan and description matches up with the property you are buying. If it turns out down the line that there is a mistake, then you are heading down the path of a boundary dispute. Only recently when examining title of a property, we discovered that the wrong plan was included in the property’s land certificate which means the land certificate will have to be corrected before we can proceed with purchasing the property.  Another critical point is making sure that you have all the necessary rights of access to your property. If you don’t, you could find yourself not being able to access your property or use a certain part of it.

Leasing a Property

In terms of a lease, you should be checking that 1) you are actually leasing all the property you intend to occupy, and 2) most importantly – that the landlord owns the property, or has title to it under a head lease. Other factors that you should be very clear on are: access rights, repair obligations, the amount of rent, when rent is to be paid, any rent reviews and whether there is any Land Buildings and Transaction Tax due.

Terminating your Lease

If you wish to end your lease on the termination date then you must make sure that you send a notice to quit in the agreed form, send it to the correct party at the specified address, at least 40 days before the termination date of the lease. If you do not do this, or if the notice is defective in some way, the lease will continue for another year under tacit relocation.

You may think that we are stating the obvious, but it’s amazing how easy little mistakes are made.

If you need any advice on your property or lease, then please get in touch with a member of the commercial property team.

Sophie Graham is a trainee solicitor working in the Commercial Property team across Fife and Edinburgh. Sophie graduated from Aberdeen University with joint honours and speaks fluent Spanish.

A problem shared can be a problem solved

The summer holidays are nearly over and many of us may be reminiscing of gloriously sunny childhood summers of years gone by, when life was simple and someone else had all the responsibility. Although assuming the responsibility of running a business can be quite daunting, there are many easy steps that can be taken to reduce the burden and worry.

It’s normal for business managers to have worries about a whole variety of things: where future business is coming from, whether they need to upgrade equipment, who is their biggest competitor, etc. These are standard problems and can’t easily be made to go away. However, worrying about never having got around to putting a shareholders agreement in place or updating your T&Cs for the new consumer regulations is something that’s not necessary. Tidying up “the paperwork” is one of those things, like finally clearing out your wardrobe, that feels great once you’ve done it and you wonder why you had put it off for so long. It’s never as painful to deal with as you expect.

So, whether it’s checking your employment contracts and policies are up to date, documenting the rights of the shareholders, or unravelling a mess that continues to get worse, speak to us to help get some solvable worries off your plate. Sunny summers may be a distant memory, but why not do what you can to make life a little more carefree?

Alison Marshall is an experienced lawyer and business adviser offering business law and Intellectual Property advice to SMEs in Fife, Edinburgh and across Scotland.

Mum-isms

If you, like me, have suffered the pain, sorry, had the pleasure of your little cherubs at home, under your feet, for the last six miserable weeks (and I’m not referring to the weather) you have probably again, like me, found yourself repeating the many mum-isms that once upon a time you swore you would never say to your children (“I’m not going to tell you again!” is a favourite of mine).

However, there are a few mum-isms which are worth repeating – or at least in the workplace at least because they often serve as a helpful baseline of acceptable behaviour. Very helpful indeed for good employee relations and keeping expensive Employment Tribunal claims at bay. Here are two of my favourites.

If you don’t have anything nice to say, don’t say anything at all.

The reason why this mum-ism is more important than ever before is because we live in a connected digital world where almost nothing is private anymore.

Do you remember the Sony picture hack in November 2014 when confidential data belonging to Sony Pictures Entertainment was released? The data included personal information about Sony Pictures employees and their families, e-mails between employees, information about executive salaries at the company, copies of (previously) unreleased Sony films and other information. Actors were also criticized by movie producers for example, Angelina Jolie was referred to as “a minimally talented spoiled brat”. Initially, North Korea was blamed but it’s now thought it was a group of disgruntled employees. However, the simple point is any email or electronic communication of any kind could become public either intentionally or deliberately.

Indeed, just last month Spanish Football Club Deportive La Coruna canceled the transfer of Julio Rey less than a week after he signed for the Club when a tweet he posted 3 years ago about the Club was discovered (something along the lines of ‘f*** Depo’).

The message is simple: Never bad mouth anyone publically (another helpful mum-ism: Keep your opinions to yourself). Employees could find themselves answering for their actions at a disciplinary hearing while employers may be looking at expensive Employment Tribunal claims.

Say that again and I’ll wash your mouth out with soap.

Similarly, we all know (or should know) by now that there are some things we just shouldn’t. For example, to the employee who has just announced she’s pregnant, ‘I can’t rely on pregnant staff, you’re fired’ or to the devout Muslim during the office party, ’don’t be a party pooper, have a drink’. But have you thought about the unintended biases you might be giving away or discriminatory choice of words? Did you know:

  • the manager who called his young worker a “teenager” and a “kid” had discriminated on grounds of age?
  • Borat, the ill advised nickname given to a Polish worker was race discrimination?
  • Yoda as a nickname was age discrimination? or
  • male colleagues saying ‘how’s it hanging’ and making sexual hand gestures was sexual harassment?

Perhaps it should be a case of speak only when spoken to?

Donna Reynolds is an experienced Employment Lawyer advising SMEs in Fife, Edinburgh and across Edinburgh on Employment Law and HR issues.