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Break Clauses in Commercial Property Leases

At one time, break clauses (which are generally designed to be advantageous to tenants) in commercial property leases, were routinely rejected by landlords. They were confident of securing other tenants if the need arose.

However, in a more uncertain economic climate, flexibility for tenants is a real lure. Landlords may be more inclined to agree to include break clauses, and less inclined to be flexible and let tenants off the hook if mistakes are made when trying to exercise those breaks.

Needless to say, break clauses are a hot topic of litigation in the current economic climate. Understanding the implications is essential for both landlords and tenants.

What is a Break Clause?

A break clause usually provides a tenant with a contractual right to end the lease early if certain conditions are met. Landlord breaks also exist although they are less common.

There are three ways a break clause could be drawn up:

  1. On a fixed date – once this date has passed, unless there is another opportunity to exercise the break clause, you will have to continue with the lease until the end of the contractual term.
  2. After a specified date – a minimum period of occupation will be required by the tenant. After that date, the break clause can be used.
  3. Any time – sometimes referred to as a rolling break clause, this allows a particular party to terminate the lease at any time.

There will usually be specific notice requirements in all three scenarios. Using a break clause to end a commercial property lease may be conditional on certain things. For example – making sure the tenant has complied with all the terms of the lease.

The most common cause of break clause disputes is when a tenant has not complied with the pre-conditions for a break included in the lease.

Implications for Landlords

If the tenant requests a break clause, Landlords should ensure they are properly advised to minimise their risks. The landlord will often insist on ensuring certain criteria are met before the break clause can be used. These can include:

  • All rent has been paid by the tenant, including any interest
  • Compliance with all tenant covenants within the lease
  • Vacant possession of the premises on the break clause date.

This is not an exhaustive list and there may be others a landlord might wish to include. It’s essential that all conditions are negotiated and drafted carefully to fulfil the landlord’s requirements. If for any reason there are signs of ambiguity in a tenant only break, the courts will generally favour the tenant’s in interpreting the clause.

Implications for Tenants

Despite a landlord wishing to include pre-conditions to a break clause, a tenant must keep in mind that overly onerous conditions could effectively mean that they cannot use a break clause, despite the lease including one.

The Code for Leasing Business Premises in England and Wales 2007 (‘the Code’) can help tenants when trying to limit the pre-conditions when negotiating the lease at the outset. However, it won’t help when it comes to using the break right later on.

The key is to make sure the lease works for you from the start.

Tenants must strictly comply with all the provisions set out in the break clause, including any pre-conditions. If the landlord wants to dispute non-compliance with anything in the lease or the conditions within the break clause, a well-prepared tenant will have kept suitable evidence to prove otherwise.

Top Tips for Tenants

If you’re a tenant, here are a few top tips to keep in mind:

  • Make sure you know the timing of the break notice. Does it need to be served months before the break date in the lease?
  • When you serve the break notice on your landlord, make sure you do so in accordance with the lease and keep any evidence as an audit trail.
  • If payment of liabilities is a precondition, make sure they are paid and that you have evidence.
  • Check if there are any other tenant covenants that have not been complied with, and rectify them as soon as possible before issuing the break notice. A landlord doesn’t have to tell you what they require to ensure you are compliant. Make sure you take active steps to either ensure this condition is removed or its effects are minimised.

 

For more information or advice on negotiating a break clause, using a break clause or actually issuing the break notice, please contact specialist commercial property disputes lawyer Dan Harley on 0115 9 100 295 or click here to send an email.

 


Break Clause Q&A

Q: I want to bring the lease to an end by using the tenant only break clause. One of the pre-conditions of the break clause states “the tenant must have paid all rents due under the lease”.  I pay rent on a quarterly basis in advance. However, the break date set out in the lease is 10 November. Under the break clause terms, should I pay rent up to the end of the quarter or on a pro-rata basis to 10 November?

A: You will have to pay the full quarter rent up to the 25 December.  Recently, there has been some debate about whether a landlord should repay the tenant any overpayment of rent.
The courts have sided with landlords. If the lease had intended for there to be a rebate, it would have been expressly stated.  Therefore, tenants be aware. Make sure your rent is paid in accordance with your lease provisions, otherwise you may forfeit your break right.

 

Q: I entered into a sublease of a commercial premises which benefits from security of tenure. The head lease is contracted out and contains a break clause. If the head lease chose to exercise the break clause, would my lease also come to an end?

A: Unfortunately, yes. If a head lease is terminated because a break clause has been used, then the underlease will also come to an end. However, if Part 2 of the Landlord and Tenant Act 1954 applies to the underlease, you will have the right to request a lease renewal from the head landlord despite your current lease coming to an end.

 

Q: A Limited took a 10-year lease on a commercial premises with the option to exercise their break clause on the 3rd and 5th anniversary.  On the 4th anniversary A Limited was acquired by B Limited. B Limited notified the landlord that all future payments will be made by them. The landlord sent all invoices in the name of B Limited.  B Limited wanted to exercise the break clause and issued the break notice. However, they signed it on and behalf of B Limited.  The Landlord rejected the break notice and said it was invalid because it was not signed by, or on behalf of A Limited.  Can the Landlord do this?

A: The harsh reality is yes, they can.  This is why it is so important to make sure the correct person is sending the break notice, it is being sent to the correct person at the correct time, using the correct method.  The break clause was drafted as personal to A Limited. It was a requirement that A Limited signed the break notice.  Whilst A Limited and B Limited were in practical terms one and the same, and despite B Limited being sent the rental invoices, they were still not legally entitled to exercise the break clause.  Had they clearly identified that they were agents of A Limited then the notice might have been accepted.

Posted on December 16, 2019

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