The changing economic climate and market conditions means that break options in commercial leases are commonplace. The options may give tenants or landlords a right to break the lease earlier than the agreed termination date, or it may be a right enjoyed by both parties. The party seeking to end the lease must serve a written break notice signifying intention to terminate the lease early on the other party.
There are strict rules to be followed when serving break notices and the courts can be harsh when interpretating these notices. The slightest error and there may be no freedom!
The Sheriff Court case of Hingston & Others v Craigellan Assets Limited [2022] SC STO 35 demonstrates just how important it is to get break notices right.
Background
The pursuers were the individual partners in a law firm Graeme Murray & Co. In 2009, they agreed a lease with the landlords Craigellan Assets Limited of premises in Aberdeen-in terms of which they were jointly and severally liable in respect of all tenants’ obligations under the lease. The lease contained tenants’ break options, on 24 November 2014 and 24 November 2019, provided the landlords received six months written notice of the intention to break.
The law firm was sequestrated in 2016. Hingston purchased the assets of the firm which he used to establish another law firm, Hingston’s Law Ltd (“HLL”). Following the sequestration, HLL occupied the premises in Aberdeen and implemented all the tenants’ obligations including payment of rent.
In March 2019, agents acting for HLL issued a break notice to the landlords in ample time to comply with the notice period. The correspondence along with the break notice referenced HLL as being the client, with the phrase “agents for and on behalf of (HLL)” but referred to the lease between the pursuers (not HLL) and the defenders. The landlords’ position was that the notice was invalid, as it had not been served by the tenants under the lease, and it failed to comply with the lease. It was admitted by the pursuers that there was no assignation of the pursuers' interest in the lease to HLL, nor a sublease granted in favour of HLL.
Was the break notice sufficient for lease termination?
In considering the case, the Sheriff determined that there must be precise compliance with the agreed requirements of the break clause in the lease. The lease provided that “the Tenant shall be entitled to terminate this Lease………” The notice clearly stated that it was on behalf of HLL. HLL was not the tenant under the lease, despite HLL being in occupation of the premises, buying the assets of the previous law firm and implementing all obligations of the tenants under the lease.
The Sheriff stated that “the lease was between two specified parties who had agreed contractual terms in a commercial matter. If third parties were able to issue break notices and bring about an end to the contractual relationship, this would lead to a considerable degree of ambiguity and uncertainty in the commercial world”. The contractual terms governing the relationship was priority. The Sheriff’s view was that the notice ought to have been given by the sequestrated partnership, not by HLL, as the lease provided. Where a notice would effect fundamental change in the parties’ relationship there must be strict adherence with the lease conditions. Accordingly, the nature of the notice in the present case required a greater need for strict compliance.
Hingston illustrates that it is crucial to follow the specific break provisions in the lease. HLL believed that it had acquired interest in the lease when they had obtained the assets and complied with the lease obligations of the tenants. But there was insufficient information in the break notice, and it did not comply with the lease requirements. The consequences of errors in break notices could leave tenants tied down for the remainder of the lease duration or until the next break date.
The decision emphasised the need for exact compliance with the lease terms for notices with “drastic” consequences (Hoe International Ltd v Andersen) such as break notices which inform the other party of the lease termination. Otherwise, notices may be invalid as in Hingston.
Future change?
The Scottish Law Commission has recognised in the Draft Leases (Automatic Continuation etc.) (Scotland) Bill, the disadvantages of lack of communication of the change in either the landlords or tenants. The Bill provides that where the interest of landlords or tenants is transferred to new landlords or tenants and the change has not been communicated to the other party, that party may give any break/termination documents to the former tenants or former landlords until notified in writing by the new parties of their names, and a postal address. In these situations, the break notice/termination document is treated as having been given to the new landlords or new tenants.
This appears a welcomed provision and prevents parties being deprived of a “break” option when unaware of changes in the landlords or tenants. The Bill is in the Scottish Parliament’s Programme for 2024-2025 and only time will tell whether this change will be implemented into law.
Looking to exercise a break option or terminate your commercial lease, please contact our Commercial Property team on 03330 430350.
