Commercial leases – when time is of the essence

Where time is of the essence in relation to the exercise of a right, the failure to exercise that right within the time limit specified means that the right is lost. An example of this might be where a contractor fails to complete works by a certain deadline, in which case it may lose the contractual right to complete those works and the innocent party will be entitled to terminate the contract.

What is the position then in relation to commercial leases, in particular in relation to the exercise of a break clause, or triggering a rent review clause?

Rent Review

It is important to ascertain the position and to comply with any deadlines as failure to do so could be severe. For a landlord, failure to exercise a rent review clause in time may mean it cannot operate the rent review and loses out on a higher rent, for a potentially significant period of time. For a tenant, failure to respond to any rent review notice in time may result in the rent automatically being increased to the figure proposed by the landlord, even if unrealistic and well above market rate.

The general presumption is that time is not of the essence in relation to the operation of a rent review clause. However, this will be displaced in the following instances:

• Where time is stated to be of the essence in the rent review clause;
• Where the wording set out in the rent review clause is sufficiently emphatic to show that time was intended to be of the essence (for instance, where the clause states that no other date or deadline is acceptable);
• Where the rent review clause contains other indications that are consistent only with time being of the essence (for instance, if the clause sets a deadline for service of a tenant’s counter-notice and then spells out the consequences if the tenant fails to meet that deadline); and
• Where the lease contains other provisions evidencing that the parties intended the rent review deadlines to be strictly observed (for example, where there is an interrelationship between the exercise of a rent review clause and another deadline in the lease, such as the exercise of a break clause).

It is the general presumption that time is not of the essence in relation to rent review and therefore not uncommon for landlords to delay in the implementation of rent review, particularly in a stagnant market where they will realistically not be able to get a better rent.

Break Clauses

By contrast to rent review, time will always be of the essence in relation to the operation of a break clause, unless it is specifically stated not to be.

Failure to operate a break clause in time could have severe repercussions for a tenant wishing to vacate as the lease will continue. The Courts have traditionally taken a strict approach towards compliance with break notices by tenants and therefore it is imperative that no deadlines are missed. For instance, if a lease requires 6 months’ notice of exercise of a break clause, failure to provide 6 months’ notice will mean that the right is lost and the tenant will be unable to break the lease.

It is good practice for any tenant in negotiating a lease, to carefully consider the wording of any proposed break notice. In addition, the tenant should seek to ensure that the validity of a break notice is not contingent upon any pre-conditions, for instance the vacant possession of the property. In practice, this will not always be achievable and will be a matter of negotiation between the parties when the lease is agreed.

Where there is a dispute as to whether time is of the essence, the starting point will always be to consider the wording of the lease, as well as the factual circumstances existing between the parties at the time the lease was agreed.

This article is not intended and should not be relied upon for legal advice, Should you wish to discuss your matter, please contact Joe Reeves of our Litigation Department on 0207 481 6383 or joe.reeves@wellerslawgroup.com.