MAKE OR BREAK… FOR TENANTS WHO WISH TO END LEASES EARLY

Tenant break options are nowadays popular and for good reason – most businesses value flexibility and they want to avoid long-term commitments to stay in commercial leases. Whilst leases of 10 years or longer are not uncommon, the majority of those will include tenant only break options at the end of either 3 or 5 years.

There are, though, a host of traps for the unwary tenants wanting to exercise break options. Some of these we have written about before on our website, often giving our readers goosebumps by citing the grim consequences for those businesses unable to exercise the option. These traps include:

• the importance of serving notices in the correct manner; a letter written to the local landlord manager is unlikely to be sufficient

• ensuring that the notice is sent to the correct landlord; this may not be the person named in the rental invoices or as described in the original lease

• ensuring the correct amount of rent has been paid as at the tenant break option date; any underpayment and the tenant risks losing the ability to exercise the break option

A recent court case of the High Court in England, Goldman Sachs International v (1) Procession House Trustee Ltd on 3 May this year, has highlighted a further potential trap. In this decision the court had to decide whether a tenant should be allowed the benefit of its break option where the tenant had left the property but failed to remove tenant fit-out works. The landlord promptly claimed the tenant break option to be invalid because although the tenant had paid all rent to date and given up occupation, it had failed to comply with a condition attached to exercise of the break option, namely the removal of the fit-out works.

Fortunately for the tenant, on this occasion the court decided to “give them a break” by interpreting the specific wording in the lease in their favour. It was, though, a very close call for the tenants and the landlord has been given leave to appeal.

The all important lesson for tenants wanting to exercise break clauses is clear: not only should they make sure the tenant break notice is served properly but they must ensure that they comply with the terms of the lease. Giving up possession of premises can sometimes mean more than just leaving. In some leases tenants may require to remove fit-out works and alterations such as internal partitioning, reception desks, lifting equipment in industrial units or disabled access ramps. In other leases, however, the tenants may be prohibited from removing fit-out works or alterations unless the landlord specifically directs them to do so. Each lease varies and needs to be read carefully. It pays to do so review the lease carefully rather than to risk an expensive dispute with landlords.
If you would like advice in this area please get in touch either myself (michael.dewar@ccwlegal.co.uk) or one of our other solicitors in our property team.

Michael Dewar, Partner

Commercial Contracts

But we varied our contract, didn’t we?

Something about making contracts, particularly business to business contracts, which is often forgotten by the parties is that, while the UK tradition is you have freedom of contract, your freedom is curtailed the moment the contract terms are agreed. If I can prove you agreed to sell a particular thing to me (say a piece of plant) for an agreed price at an agreed time, you no longer have freedom to sell it to anyone else- because I can sue you for breach of contract.

A common feature in written business contracts is a clause forbidding variation of the contract unless the variation is recorded in a particular way e.g. by a further written exchange signed by the parties. So what happens if the parties seem to vary what was agreed, but only by acting in a different way to what is recorded in their written contract? For example, informally, a licensor of serviced offices does not strictly insist on a set instalment of the licence fee being paid by the licensee at a fixed time (monthly, quarterly or whatever)? Arrears build up and the licensor seeks to enforce the strict terms of the licence. This is what happened in a case decided this month by the UK Supreme Court, where the licensee claimed the licence contract had been varied informally.

In essence, the licensee’s argument was the parties to the contract can always agree between themselves to do things differently (after all they are the same parties). The fact no written variation of the sort contemplated by the contract was signed did not matter. This argument was firmly rejected and the earlier decision of the Court of Appeal overturned (showing even very senior judges can get it wrong sometimes).

In short, the judicial reasoning is (a) such clauses prevent attempts to undermine written agreements by informal means, which may be open to abuse; (b) oral agreements can give rise to misunderstandings as to the nature of the variation, something which such clauses avoid; and (c) formality in recording variations makes it easier for businesses to regulate their own management team’s authority to agree variations with the other party. The Supreme Court considered these to be legitimate commercial reasons for agreeing, and expecting the courts to enforce, what are, after all, the parties’ own freely chosen rules on variation; it is not the role of the law of contract to obstruct the legitimate intentions of businesspeople.

So be careful. If your contract has a procedure for regulating variations and you believe the other party has agreed some important change to your contract, do not wait for the dispute you think will never happen, get the variation documented and signed as required by your contract.

Even if there is no control on variation, remember the courts always start by looking at the written terms agreed by the parties. If those are clear, the courts will be reluctant to accept the parties have orally, or by their acts/omissions, varied the written contract. If you are facing such a set of circumstances, but it is now too late to get a written agreement documenting the variation, at the very least look for all the evidence you can produce to convince the court (1) the parties agreed to vary their contract and (2) as to what the detailed variation was.

Finally, if you fail to prove the parties varied the deal, you might at least have an argument that the other party is personally barred by their actions or omissions from enforcing the original contract against you (but that is very difficult to do and a subject for another day)

Stephen Cotton, Partner

 

If you would like to discuss any contract queries you have please contact Stephen Cotton or Emma Arcari

 

 

AVRIO

 

So – it’s that time of year again when we remember to remind you all about Avrio. Each year, in Spring and Autumn, Avrio members gather together for a conference. The May 2018 conference is in Brighton, with 51 representatives there from 25 countries.

I’ve been involved with Avrio since Autumn 1990 (annoyingly, just missing the Spring 1990 meeting in Berlin – not long after the wall fell). Despite what of my colleagues have inferred, this hasn’t just been nearly thirty years’ of travelling and meeting (and eating and drinking) at their expense…..

We, and I, have learnt a lot in these years. One of the big lessons I learnt early on (when everyone from northern Europe responded to a questionnaire on time, and no-one from southern Europe did) is that neither is right or wrong: it is the way that things are done by those people. Similarly, when a German colleague wanted a two day response time from everyone with a progress report on a litigation matter, a colleague from Portugal said he would get a proforma response prepared – because nothing would happen for years. Again, that’s just the way it is: neither right nor wrong. But it does seem something that the UK has ignored in relation to the tortuous Brexit negotiations.

What have we gained from membership of Avrio? Some overseas customers that we wouldn’t have but for Avrio. The ability to get help for our customers from trusted colleagues elsewhere. And the ability for those involved in Avrio to get all sorts of training: not to get hung up on whether something should be subject to Scots law (because lawyers really like these jurisdictional points); when I was in the chair, how do deal with lots of lawyers used to getting their own way (think of herding cats…); and really thinking about and discussing cross-border issues.

Avrio and its members and connections are there for CCW’s customers to use. Broadly speaking, if we don’t have a member in the country that concerns you or that member doesn’t do the sort of law you need, we’ll find the right person for you.

John Clarke, Partner

 

For further information on AVRIO please contact John Clarke

Does your contract refer to Europe?

There are endlessly longs list of things that might be required in order to prepare for Brexit for businesses. Because the type of arrangements to be put in place post-Brexit are not yet clear, many of the items of those lists are still uncertain.

 

However, one thing that can be done now, which will put firms in a more robust place post-Brexit, is to check their new and existing contracts that have implications in more than one EU member state. Quite often such contracts will define the EU or Europe as a territory – perhaps for a licence of rights or a restriction of some kind.

 

Look closely at how “EU” is defined. Is it “the EU as it is composed from time to time”? Is it “the EU as at the date of the agreement”? Is it just “the European Union”? The definition used may result in either the UK being excluded from it shortly, or remaining in it when it is not any longer a member state. Even worse, vague definitions might be unclear and result in dispute.

 

Whichever way it is drafted, there is a real risk of unintended consequences come 30 March 2019 (or possibly at the end of a transitional period).

 

In many cases, the parties are likely to come together and agree how things are to be dealt with going forward, and that will be much easier to do in advance of the withdrawal date. However, in less friendly relationships, there is a risk that a party tries to take advantage of such drafting. Either way, it makes sense to check your contracts and approach other parties sooner rather than later.

 

It goes without saying that the other step to be taken is to look at any new contracts being entered into – especially if you use standard template contracts. Think carefully about how you define a European territory – perhaps list the specific states, if appropriate. Consider inserting clauses to deal with Brexit-induced changes, which might trigger a right to terminate or renegotiate should certain repercussions of those changes adversely affect the efficacy of the contract.

 

Many businesses are currently feeling a bit helpless in relation to preparing from Brexit, but these are real, practical steps that can (and should) be taken right now.

 

To discuss this matter or to find out more information please contact Alison Marshall