The Lease Code allow only three pre-conditions to be made for tenants to exercise any break clause:

There was a lengthy discussion within the Lease Code working group about what we should say about break clauses. There was a stage at which it looked as though we would actually be suggesting there should be no conditions at all. That was not the way it ended up; there were various parties that were not happy with that. But what we did end up with was flexibility and certainty for both parties.

I think that certainty works both ways.

If you have an argument as to whether there has been compliance, or material compliance, what you end up with is a situation where the tenant has purported to exercise the break clause, is given the 6 month notice, has perhaps made the staff redundant and has left so the place is unoccupied. The landlord then says, "well you haven't complied with ...." , whatever it was, and there is then a dispute. So what is going to happen at that stage is, if it is not negotiated away, you are going to end up in court.

I don't deal with dispute resolution but I guess in that situation, and with whatever is involved and with sufficient monies involved, you could take at least a year to get into court. At that stage the place has been empty, the tenant is saying it is not theirs, the landlord is saying it is. You have a dilapidating property, which is empty. The purpose of property, as far as I am concerned, is to be used for a trading purpose of some kind.

As far as I am concerned, the purpose of break clauses is to achieve certainty and it is, in effect, equivalent to the end of a lease, whatever the courts may have decided about the strict interpretation of what effectively is an option. It seems to me illogical for a landlord to say that the lease has not come to an end, because for instance, the rent is in arrear, and actually the lease should continue. In most cases if the rent is in arrear, the landlord will be saying, "I want them out. I am going to take forfeiture proceedings". So it does seem to be illogical.

Having said that, the three conditions we have in the Lease Code are wholly within the tenant's ability to comply with:

So what is happening in practice?

In my experience, the drafting of a break clause on the landlord's side is usually not Lease Code-compliant.

"Leases should allow tenants to assign the whole of the premises with the landlord's consent not to be unreasonably withheld."

There is nothing special about that. What is special is the Lease Code also provides that leases should not refer to any specific circumstances for refusal. There are additional provisions for authorised guarantee agreements and where there is a group company. In effect, where there is equivalent financial strength, or not equivalent financial strength, an authorised guarantee agreement can be required.

What is happening in practice?

You see all manner of different drafting. The worst I have seen recently, from a tenant's point of view, is a requirement that as a condition to assignment, any outstanding rent review should have been settled. Well, you are either going to have a very long wait to get your assignment or alternatively the poor old tenant is going to be persuaded to agree a figure that is well in excess of the market rent. That, I think, is so clearly unfair it's almost not worth saying any more, but I have seen it.

What you also see is "equivalent financial standing". I call this the "ratchet effect" because if you have tenant of a particular covenant strength, that means that they can only assign to someone who is at least as good. If they have assigned to a tenant whose covenant strength is better and that person wants to assign, you keep going. For Marks & Spencer, or someone like that, the lease is effectively unassignable. That is not good news and, again, that is outlawed by the Lease Code.

I do not think I have an issue with "sufficient financial standing". You do see this in the drafting. There is really no point in arguing that. It is demonstrably fair. I think if you have a tenant who is not of sufficient financial standing to pay the rent and observe the covenants, it is reasonable. I do not have a problem if people want to put that in.

One of the other conditions that you see, is that arrears of rent should be paid. I don't really have a problem with this if it means the basic rent. However, rent is so often defined to include service charge. Then there may be a dispute. What I would normally expect or hope to see is that there should not really be arrears of rent save where there is a bona fide dispute or something like that.

In the older days, there were frequently profits and assets tests. I've never felt very kindly towards those. You could go back to the recession in the early 1990s, but you need only go back to the last few weeks, with the sub-prime lending disasters, and you would probably find that on any profits tests, most of the banks would not be able to take an assignment of any lease, and that I think demonstrates why it is not realistic. If it is reasonable for a landlord to refuse, then they should do so.

You then sometimes get a reference to there not being a breach of covenant, and that can sometimes be watered down to a material breach of covenant. I don't really like that either because what happens is that you have the dilapidations, which is the usual problem, which might be material or it might not be. What is happening is that the tenant is wanting to assign and almost inevitably in a retail situation, the new tenant is going to be doing a re-fit, so those dilapidations are going to be dealt with. It is completely illogical to say that the tenant should have to deal with the dilapidations first, and then the new tenant comes in and effectively has to do it all over again.

That can be covered, I think, if it was reasonable, by imposing an obligation on the assignee to do the works or perhaps, say, pay a deposit of money, if there were a situation. As mentioned earlier, it is all a question of what is reasonable in the circumstances rather than prescribing a situation, which may not be reasonable.

If underletting is allowed, the underlease rent should be the market rent at the time of subletting, not at the higher of that rent and the passing rent, which can effectively make the premises not underlettable. if the sublease is to be excluded from the renewal provisions of the 1954 Act, it should not have to be on the same terms as the tenant's lease out of which it is granted.

I think you see very often that the basic requirement is for all subleases to be excluded from the 1954 Act. You can understand that on the basis of the landlord not wanting to be stuck with what I would describe as a "dodgy tenant", or a split building in a way that is not appropriate for going further. In those circumstances, of course, it is going to be quite reasonable for the landlord to say, " no, I want the underlease to be outside the Act".

But it wouldn't always be the case. There is a need for flexibility.

A tenant who has taken, perhaps, a 15 year lease, but it has not been a success and the tenant has relocated. The tenant wants to grant a sublease: it cannot get an assignment. You may well have a situation where it the tenant is a starter tenant. At that stage, the landlord may say, "yes, I want the sublease outside the 1954 Act". Equally, the tenant may be coming to the end of the term, and the subtenant may say, "yes I will take the premises either on an all-inclusive basis so I am not too fussed about the service charges or I will have a schedule of conditions". At that stage the underlease will not really be on the same terms. That is the purpose of the second limb of the Lease Code. If it is going to be outside the 1954 Act, it may be reasonable for the underletting not to be on precisely the same terms.

Now you do get clauses, more often than not, which require the underlease to be on those same terms. If it is not worded in that way, it is often a requirement that the undertenant has to give a direct covenant to the landlord to observe and perform the terms of the headlease, save payment of the rent. Effectively these two are the same point. I have had it very recently where in fact the head landlord was quite happy and then their lawyers picked up this point, and we had months of argument before they were told that yes, that may be right, but go ahead with your underletting anyway.

Then the final point is going back to the pre-BPF declaration as mentioned by Ian. This is the requirement that the underlease rent should be the higher of market rent and the passing rent. I really don't see that in drafting anymore. I think the BPF declaration has worked pretty much 100%, and as I said, it is very rare that you see it. You need to ask a surveyor, but my understanding as a lawyer is that where you have a requirement that the underlease rent should be the higher of the market rent and the passing rent, it effectively becomes impossible to underlet where the market rent has gone down.