Alan Macdonald, senior solicitor in the commercial dispute resolution team at MacRoberts in Glasgow, writes on the activation of the break clause in the British Grand Prix contract.
On the 11th of July 2017, the British Racing Drivers’ Club (“BRDC”), as owners of the Silverstone race track, made a decision to trigger the “break clause” in their commercial lease with Formula One Group to host the British Grand Prix. The termination would take effect from 2019 leaving Formula One fans facing the prospect of there being no British Grand Prix on the Formula One circuit for the first time in over 60 years.
There are a number of commercial factors that may explain why the BRDC have taken this decision but this article will examine the legal flexibility generally that break clauses provide parties to a contract and the associated risks for the parties involved.
What is a break clause?
A break clause can be included in a commercial lease allowing either the tenant or the landlord to terminate the lease early. Break clauses may be broadly divided into three types. The first is a landlord-only break, where the lease allows the landlord, by notice to the tenant to terminate the lease without any corresponding right being given to the tenant. The second type is a tenant only break which allows only the tenant to terminate the lease. Lastly, a mutual break clause is where either party can exercise an option to terminate.
How can a break clause be exercised?
When a party wishes to exercise a break clause they must ensure that notice is delivered to the receiving party, at the correct address, and in accordance with the terms outlined in the lease. The break clause can specify the form the notice must take, whether it should be served via Royal Mail post or hand delivered. The notice must be served correctly in order for the break clause to be effective.
Depending on how a lease is drafted the right to break the lease may arise on one or more specified date, or may be exercisable at any time during the term of the lease. Time is of the essence when serving notice of a break clause so it is essential to determine the precise dates in order to serve notice in the correct timescale.
Break clauses often have conditions attached to them which must be satisfied in order for the break clause to be exercised. The break clauses can contain various conditions for example a tenant must pay all the rent or payments under the lease, or the tenant must have left the property in a good state of repair. If a tenant or landlord fails to ensure that even one of the conditions outlined is met then the lease cannot be terminated.
Issues with break clauses
- Once the notice exercising the break clause has been served the notice cannot be withdrawn. It is important for the party exercising the break clause to ensure that termination is the most suitable option for them at that time.
- All the conditions in the break clause must be complied with. If these conditions are not satisfied the lease will not come to an end and the tenant or landlord will be left with the liability of an unwanted lease until it expires. Something as simple as a failure to resurface a racetrack can prevent the lease from being terminated.
- The correct break date must be determined, the break notice served in good time and strictly in accordance with the terms of the lease.
- All outstanding payments due must be made, even if these payments are in dispute, to satisfy the conditions of the lease. These can be made on a without prejudice basis and can be disputed later.
- All of the general obligations that apply at the end of the term of the lease will also need to be complied with.
Since BRDC have activated the break clause in their lease it is their responsibility to ensure that notice of the conditions attached to the break clause is given to The Formula One Group, in order for the lease to be terminated effectively on the break date in 2019. With another successful British Grand Prix being won by local favourite Lewis Hamilton on Sunday, it will be a source of great frustration to fans that they may only have two more years of seeing Formula One’s biggest names performing on British soil. Whilst BRDC have said they are open to re-negotiating new terms with the Formula One Group, the current position is that, provided the break clause has been executed effectively, the 2020 Formula One World Championship will be the first Championship in a generation without a Grand Prix in the United Kingdom. This high profile example of the use of a break clause and will hopefully provide landlords and tenants alike with some fuel for thought in relation to both the practical exercise of such clauses and both the advantages and risks associated with a clause of this kind.