Can’t get a break

When renewing their leases, it is common for commercial tenants to seek the flexibility of a break option.

The recent case of Kwik-Fit Properties Ltd v Resham [2024] illustrates how the court will approach such a request where it is opposed by the landlord.

Dispute at hand

Kwik-Fit sought a 15-year lease with tenant-only break options every 5 years. These were opposed by the landlord on the basis that they would diminish the value of the freehold reversion, undermining their investment strategy.

Kwik-Fit sought to rely on a company policy of seeking 5-year break options, which they claimed was in line with their ‘ongoing position of developing change’, where the ‘development and outcome is unpredictable.’

Basis of the judgment

1. The leading case of O’May v City of London [1983] puts the onus on a party seeking new or modified lease terms to show that the change is fair and reasonable.
2. The Court analysed Kwik-Fit’s assertion that the inclusion of a break clause was not only in line with company policy, but also with wider market practices within the auto-fit industry. However, the evidence from a review of leases entered into both by Kwik-Fit and by their competitors in recent years was inconclusive.
3. NCP v Paternoster [1990] established that the test for the inclusion of a landlord development break clause was based on the real possibility that redevelopment would occur during the lease term. An analogous test was applied here, i.e. could Kwik-Fit prove there was a real possibility that the break option would have to be exercised because the property might become unsuitable for Kwik-Fit’s business during the lease term. Kwik-Fit failed to satisfy that test.
4. The Court also considered whether the inclusion of a break clause could be made fair and reasonable by the compensation of an increased rent. It was held that a higher rent level would not adequately compensate the landlord if a break option was exercised.

Accordingly, Kwik-Fit’s request for tenant break options was unsuccessful. As a County Court judgment , this case does not set any binding precedent, however it certainly suggests that the courts will look unfavourably on parties who conduct lease renewal negotiations with a rigid approach dictated by company policy.

Parties to lease renewals need to consider how their objectives can be obtained in a way which does not unfairly prejudice the other party. If a tenant’s primary objective is flexibility, they may be better advised to seek a shorter lease term, rather than trying to impose tenant break options on a longer lease term.