There are many reasons why a tenant may wish to exercise a break clause in a commercial lease agreement. You may have grown unsure about the location, you may have run into financial difficulties or you may have found that your business is not suited to the premises. Whatever the reason, expert advice is a must once you’ve made your decision. Dhiran Mistry, a Solicitor in our Commercial Property department, provides an overview of this particular area.
How does a break clause work?
A break clause allows either or both parties to end the agreement early. Often this is only able to be exercised after a specific date or after a specific period, either on a rolling basis during the terms of the lease or expressed as an actual date. The lease may specify that:-
- The lease can be terminated at any time. This is known as a rolling break;
- The lease can be terminated at any time after a specified date. The tenant, therefore, has a minimum period in occupation before the break becomes exercisable;
- That the lease can be terminated on an agreed fixed date or dates. Fixed dates are often linked to rent review dates so that the tenant may end the lease if they do not wish to pay the increased rent;
- The parties to the lease may express the break dates as actual dates. For example, there may be a right to break on each fifth anniversary of the grant of the lease. It is preferable to work out the precise dates and insert these in the break clause to avoid any uncertainty.
To be valid, break clauses must be agreed by both landlord and tenant when the lease is being drafted.
Why pre-conditions are a big factor in break clauses
Break clauses usually include pre-conditions which mean that exercising them can be complex. From a tenant’s point of view, a landlord will be reluctant to allow a break clause to be activated due to loss of rent or the requirement to find a new tenant.
One of the most common pre-conditions of a break clause is the notice required. The agreement should detail:-
- How notice should be served;
- Any charges that apply, as well as any applicable general notice provisions;
- Pre-conditions can also include the tenant being obliged to pay all the rental payments currently due under the lease. This can cause issues where rent is paid quarterly and the break date falls in between this time. Disputes can therefore arise, which may result in a landlord preventing the tenant from exercising the break clause.
Complying with covenants under a lease can also be problematic and lead to break clauses being halted. It is usually a condition that tenants have not breached a covenant or condition at the relevant time. Many tenants are wary of agreeing to such pre-conditions – or they should be advised to be wary – as they can be very restrictive and can make it almost impossible to break a lease, unless you specifically seek to establish which breaches need to be remedied from the outset.
Vacant possession is another common pre-condition, meaning the tenant must remove all fixtures and fittings from the property in time for other occupiers to move in to replace them. This can involve removing alterations to the premises and returning them to the condition in which the landlord first let them.
Tips for tenants in exercising break clauses
While exercising a break clause may not be straightforward, with good legal advice the path can be made much smoother. Points to think about could include:-
- Ensure the heads of terms are agreed with the landlord’s agent ;
- Avoid agreeing to restrictive pre-conditions. As a tenant you should definitely be aware of notice periods to ensure you are leaving sufficient time for the break clause to be activated and for you to comply with its requirements. This applies also to the specific dates within which you are able to exercise the break clause.
Getting this wrong can be costly to your business. Seeking specialist legal advice at the earliest opportunity can be essential, something our Company and Commercial team know very well. Our experts can advise as to how and when you should act- and what you should agree to. Contact us today on 0113 284 5000 to find out how we can help.
