Understanding break clauses in commercial leases

Posted 23rd April 2014

Written by Claire Armer

A break clause is an express provision drafted into a commercial lease which enables a landlord or tenant to terminate a lease before the end of the agreed term.

A party’s ability to exercise a break clause will vary from lease to lease.  Although more commonly drafted in favour of the tenant, they may be drafted in favour of the landlord or it could be a reciprocal right to terminate. Break clauses can be very time specific and relate to a set date(s), alternatively they can be exercisable at any time on a rolling basis. Irrespective of who may exercise a break or when it can be exercised, there will be specific requirements with regard to the service of notice and in the case of tenants exercising the right to break, there will be specific conditions that must be met in order for the break to take effect.

If you are already a party to a lease which incorporates a break clause, then take the time to review the clause and consider the factors below and how they may impact your position under the lease.  Irrespective of whether you are the landlord or tenant, or how the break clause is drafted, it is vital to fully understand your options and obligations (as well as those of the other party) in relation to the break.  The requirements to effectively exercise a break are extremely strict and there is no leg room for mistakes.

Serving Notice

A break clause will normally provide that the person exercising the break is required to give a minimum period of notice in writing. There is no set rule for the length of a notice period and this can vary from lease to lease. On a rolling break, timing for service is not too important however, where a break clause is date specific, the timing of the service of the notice is critical. As time is of the essence, it is vital that when exercising a break great care is taken by the party serving the notice to ensure that the correct amount of notice is given; even if a party is one day out, the break notice would be deemed ineffective.

Conditions

If a landlord agrees to a tenant’s only break clause, they will typically attempt to attach conditions to the exercise of the break. A tenant negotiating a new lease should always resist agreeing to such conditions where possible. Dependent upon the style of drafting of a lease, it may not be apparent if a break is conditional upon certain requirements being met and as such it is always advisable to seek the advice of a solicitor. The three main conditions which a landlord will seek to impose are:

  •  All rent must be paid up to date – this may seem quite straight forward but it could include all money payable under the lease including insurance, service charge and any late payment interest that may have accrued from time to time. Tenants must not fall into the trap of thinking this condition means that rent must be paid up to the break date, if rent is payable quarterly or monthly in advance then all money due under the lease must be paid up to the next rent payment date. There is no obligation on the landlord to notify a tenant of monies due so it is important that the tenant raises specific enquiries in this regard.
  • Tenant must give vacant possession – this does not mean that the tenant simply vacates the property. This condition can relate to the removal of all tenant fixtures, fittings, furniture and goods.  In addition, the lease may have a requirement that the premises are returned to the landlord in a certain condition.  This area can often become contentious between parties as satisfaction of this requirement can be very subjective.
  • All tenant covenants under the lease must have been complied with –   this is an extremely difficult condition for a tenant to comply with particularly as they may not even be aware that they are in breach of a condition.  As with monies due under the lease, it is advisable for a tenant to raise enquiries with their landlord to see if they are deemed to be in breach of any covenant and give themselves time to remedy such breach.

The above highlights some of the principal factors to be aware of in the exercise or negotiation of a break under a commercial lease.  Failure to fully understand the practical implications could be devastating for any business as the party who has failed to effectively exercise the break will be under an obligation to continue with the lease for the remainder of the term.