Universities and colleges: beware the effect of early landlord break clauses on future income streams
Many universities and colleges continue to embark on major capital projects and redevelopments of existing campus buildings. This is good news for the sector but does bring issues surrounding agreeing new leases with existing tenants into sharper focus.
Not surprisingly in this context, when current leases with security of tenure expire it is commonplace for institutions to renew leases with tenants, but only on the basis that institutions as landlords will have options to break the leases early. This is often in order to facilitate redevelopment plans and other capital projects.
Whilst this is important in ensuring that redevelopment plans are not thwarted by tenants refusing to co-operate, institutions should be wary of the effect that such early landlord break rights can have on the rent that they can command.
Case law has confirmed that early landlord only (and mutual) break clauses in leases will have a significant depressing effect on the rent which premises can command. In Britel Fund Trustees Limited v B & Q Plc the effect of the landlord’s early break clause was such that the court ordered a rent on renewal which was 20 per cent lower than it otherwise would have been. Accordingly, in cases of large premises (where the pool of tenants likely to take them may be less) or high value premises in particular, the reduction in rent due to a landlord’s break could be a very significant figure.
On one level this is understandable, as if a tenant takes a five year lease but subject to a rolling landlord’s break right after 6 months, the tenant would in effect only have the secure occupation for six months (although in practice the landlord may have to take further steps in order to obtain possession and this would take some time). As such, tenants would be likely to argue for a lower rent if they are to have very limited security.
In event that such matters are referred to the courts or arbitrators, institutions are advised to obtain early advice and to consider making offers to the tenant to settle the rent before any final hearing of the matter. This is important as such offers (and how close they are to any rent ordered by the court) may well have a bearing on whether one party is ordered to make a contribution to the other’s legal and professional costs.
Those tasked with negotiating lease rents will most likely have some visibility over these matters. It is therefore important for institutions to be aware of the impact of early landlord break rights so that they can factor in the likely outcomes in their funding and budgeting requirements.