In the first of our articles, Nick Ellis considered ways in which a tenant could review its property strategy when facing difficult times. In this article, I will be considering what tenants can learn about exit strategies from other tenants’ mistakes.

Perhaps the most immediate issue that a tenant needs to consider is whether sums currently being paid under a lease are properly due. Tenants should check whether any rent review is an upwards only or an upwards/downwards clause and, if the latter, establish, with the use of a local surveyor, if the rent indeed should decrease. If that is the case then it may well be that the tenant has an outstanding rent review that it needs to activate in its favour.

Additionally, tenants should take great care to establish that service charges are properly due under the terms of the lease. A recent article in Estates Gazette by Hazel Williamson QC (1 April 2006 ) sets out some helpful pointers in relation to this.

One of the highly contentious issues at the moment is that of break clauses. Many break clauses have two pre-conditions, namely the proper service of an appropriate break notice, and compliance or at least “substantial” compliance with the tenant’s covenants before the break date.

Whilst it is usually fairly straightforward for a tenant to establish whether rent, insurance, service charge and other sums have been paid, it can often be extremely difficult to establish whether a tenant is in breach of its other obligations under a lease and in particular its repairing obligations. Technically, some part of any property is likely to be in disrepair at any given time. Such disrepair would be a breach of the terms of the lease and if the break clause was one which simply obliged the tenant to comply with all of its covenants, then the lease would not be broken.

The recent case of Fitzroy House Epworth Street (No.1) Ltd (1) Fitzroy House Epworth Street (No2) Ltd (2) v Financial Times Ltd was a case decided by the Court of Appeal this year. In this case, the Financial Times had a break clause under which they had to have “materially complied” with their obligations under the lease by the break date. The Financial Times spent over £1 million in undertaking repair works to the premises. The landlord argued that it had found £20,000 worth of incomplete repair works which meant that the tenant had not “materially complied” with its obligations. The Court at first instance found in favour of the FT as did the Court of Appeal.

The Court of Appeal explained that the use of the word “material” in the break clause was to mitigate a requirement that the tenant comply absolutely with all of its covenants by the break date. They said that the test was to be an objective one and not what steps the tenant had taken to comply with its covenants. The issue was one of fact.

Tenants faced with conditional break clauses should therefore obtain expert advice from surveyors as early as possible in relation to repairing obligations to ensure that they comply strictly with the terms of the break clause to ensure that the lease is indeed broken. Failure to break a lease can obviously leave the tenant on the hook for substantial further rents.

Another exit strategy where mistakes are made is assignment or subletting. Obviously, the tenant will need to consider carefully its particular alienation covenant and, again having taken professional advice, consider the assignability or sub-lettability of its premises. Tenants should not forget the Landlord and Tenant Act 1988 which obliges a landlord to be prompt when responding to an application to assign or sub-let and also imposes penalties where that consent is unreasonably withheld.

In 2004, in the case of Design Progression Limited v Thurloe Properties Limited, the Judge came down hard on the landlord who he felt had pursued a deliberately obstructive policy in relation to the tenant’s application for a licence to assign designed to prevent the assignment going through. The reason for this, the Court thought, was that the landlord was trying to negotiate a surrender with a nil premium with the tenant and was unreasonably delaying his decision in relation to the proposed assignment to assist his own position. In that case, the Judge awarded damages in accordance with the 1988 Act for the loss the tenant had suffered. However, he also awarded damages in the sum of £25,000 by way of exemplary damages as a penalty to the landlord in relation to his conduct. Tenants should be encouraged that any application for a licence to assign or sub-let is backed by statute and some very helpful case law.

The third and final area for mistakes is really one of lack of communication. In the current market, particularly in the retail trade, tenants are finding things pretty hard going. Many commercial landlords appreciate this. British Telecom once ran an advertising campaign called “It’s good to talk”. That motto applies equally to landlords and tenants. Landlords are often prepared to allow payment of rent by instalments, to offer a temporary rent free period or, indeed, in some cases to accept a surrender of the lease.