Break clauses are often found in leases, and give one or both parties the option to serve notice on the other to terminate the lease early.  Notice periods can be as long as six months, so it’s not unusual for a landlord or a tenant to serve a break notice, and then decide weeks or months later that they wish they hadn’t done so.  At this point, what can be done? 

Firstly, no break notice can be withdrawn unilaterally.

Often, however, both sides agree between themselves, verbally or sometimes by exchange of letters, to ignore the notice and to continue with the lease as though it had never been served.  Does this work though? 

The answer is that it works to an extent.  A mutual agreement to withdraw a break notice has the potentially nasty side effect of creating a brand new lease that comes into effect on expiry of the break notice.  The existing lease simply terminates on the break date, per the break notice, and a new set of terms comes into being to govern the relationship between the landlord and the tenant from that point on.  It’s slightly misleading to refer to this as the ‘creation’ of a new lease since it is rare for the parties to document their ongoing relationship on paper.  Where they fail to do this, the law fills the void by implying the terms of the relationship.  Obviously, with no physical agreement in place, these terms can be ambiguous and have the effect that both parties’ positions may become much more uncertain.  For example, with no document setting out the length of the arrangement, how and when can the landlord recover vacant possession?

Other unwanted side effects of this undocumented arrangement can include -

·       From a tenant’s point of view, the new lease will not be excluded from the security of tenure provisions of the Landlord and Tenant Act 1954, meaning that the tenant will have to serve the requisite notice at the requisite time to terminate the new lease, and will continue to be liable for its obligations until the lease is terminated. This may also affect the landlord’s ability to recover vacant possession if notices are served late or if the tenant decides to request a new lease.  If the rent or the term of the new lease are deemed to be higher or longer than previously, there may be SDLT to pay.

·       From a landlord’s point of view, the creation of a new lease (even a deemed one) might require lenders’ consents, with failure to obtain these leading to breach of financing obligations.  It is also possible that guarantors who were a party to the initial lease are not deemed to be a party to the implied new lease, with potentially disastrous effects for a landlord.

·       From an undertenant’s point of view, the creation of a new lease will very likely breach the undertenant’s obligation to obtain consent from superior landlords, leading potentially to forfeiture action being taken.

To avoid these problems, even where withdrawal of a break notice is mutually agreed, it is in both parties’ interests to enter into a new, formal, written lease.  Time may be in short supply to get the lease in place, but the effects of relying on implied terms are not always beneficial.