23 October 2017

Can you withdraw a Break Notice?

What should you, as landlord, do in the event that your tenant has served a break notice but subsequently decides they want to stay?

Assuming that you are happy for them to remain in occupation and to continue paying rent, you might think it would be as straightforward as for both parties to agree, perhaps in writing, that the notice should be deemed withdrawn so that the lease continues as though the break had not been exercised. Surprisingly, this is not the case. In fact, once a break notice has been validly served it cannot be withdrawn; service of the notice effectively terminates the existing lease and creates a new tenancy by implication if the tenant remains in occupation past the break date (Tayleur v Wildin (1867-68) LR 3 Ex 303).

This causes several issues:

  1. As the parties will not have followed the correct procedure for contracting out of the Landlord and Tenant Act 1954 (the 1954 Act), the tenant is likely to automatically acquire security of tenure under their new lease.
  2. Any guarantor under the original lease would be released from their obligations thereunder and would not be a party to the new lease.
  3. If a rent deposit is held under the original lease, the terms of the deed may specify that it terminates at the end of the tenancy. Therefore, the landlord would not be able to draw down on the rent deposit to recover any arrears of rent under the new tenancy.
  4. Arguably, the tenant’s repairing obligations may be construed by reference to the condition of the premises at the date of the new lease (i.e. they will be released from liability for any disrepair caused prior to the new lease).
  5. If the rent under the previous lease was payable quarterly in advance, and the break date fell midway through a quarter, the tenant may be required to pay twice for the same remaining part of the quarter.

So what is the best way forward?

It may seem that the law as set out above prevents the landlord and tenant from achieving a sensible commercial outcome and creates an obstacle to implementing an agreement they have made. However, there are two simple solutions to the situation (one, as we will see, providing greater clarity in the situation than the other!):

  1. Do nothing. If there are pre-conditions (such as providing vacant possession of the premises, or making payment of all outstanding rent, for example), the parties can allow the notice to expire and deliberately fail to satisfy the pre-conditions, so that the break is not validly exercised. The dangers with this approach are that the landlord could waive compliance with the pre-conditions at any time, meaning the tenant’s lease will come to an end whether or not they have satisfied the pre-conditions. Equally, the tenant could decide to comply with the conditions and then the break will operate to determine the term. Any written agreement between the parties to co-operate will not be binding and could leave the other party high and dry.
  2. Document the new lease. This will ensure that the intentions of the parties are accurately recorded and if the lease is to be contracted out of the 1954 Act then the proper procedure can be followed.

Are there any SDLT implications?

Although the grant of a new lease would usually be subject to an SDLT charge, in this situation (even if a new lease is documented) HMRC will treat the original lease as ongoing and no charge will be payable. Do note though, that this is only the case where the lease rent, term and extent of the demise remain as per the original lease. If there are any changes to these terms, SDLT may be payable. 

Claudia is an Associate in our Commercial Real Estate team.

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