Most commercial leases contain break clauses, but the circumstances in which they can be exercised is a frequent source of controversy. In one case, the High Court considered whether a local authority was entitled to break the lease of a stately home hotel less than four years into its 199-year term.
The council, which owned the listed property’s freehold, granted a company planning permissions that enabled its conversion into a hotel. The company took a lease of the property at a premium of £400,000. The lease included a break clause that entitled the council to terminate it if the property’s transformation into a four-star boutique hotel had not been appropriately completed by a certain date.
The council served a break notice, asserting that the deadline had been missed. The validity of the notice was disputed by the company, which remained in occupation of the premises and asserted that it continued to be the property’s lawful tenant under a lease that would not expire until 2215.
Ruling in the council’s favour, the Court found that an event of default had occurred in that the property’s conversion in accordance with the planning permissions had not been achieved either by the deadline or by the date on which the break notice was served. The council’s motive for exercising its right to terminate the lease was irrelevant and no conduct or default on its part had contributed to the delay.
The lease having come to an end, the Court noted that the council was obliged to pay compensation to the company, based on the lower of either the open market value of the property or the premium of £400,000, plus the value of improvements the company had made to the premises prior to termination. The company having failed to vacate the property on termination, the council was granted possession of the premises on a date to be fixed.