Olivia Foster, in our Commercial Property team, explains break clauses.
What is a break clause?
A break clause is a very useful clause quite often incorporated into a lease which enables the right for either the Landlord and/or Tenant to end the lease before the expiry of the contractual term.
If you are a Landlord wanting to appeal to a prospective Tenant you might want to consider Tenant friendly terms such as a break clause, as this will give Tenants added flexibility. Alternatively you might want to retain the ability to end a Tenant’s lease early if your circumstances change, and a Landlord break would allow you to do so.
Likewise, if you are a prospective Tenant and you are concerned about being tied in to a lease of commercial premises for a long term, it might be worth trying to negotiate with your prospective Landlord a break clause before entering into a lease.
What form can a break clause take?
A break clause usually takes one of two forms:-
- A break arising on a specified “Break Date”, sometimes referred to as an “Early Termination Date”.
- A rolling break that can be exercised at any point during the lease term, sometimes after an initial period has ended e.g. “at any time after the first year of the term”.
Whether you are Landlord or Tenant it is important that the break clause has been drafted clearly to ensure you understand how you can successfully exercise the break.
Conditions attached to a break clause
It is relatively common for a Landlord to try to impose conditions on the successful operation of the break by the Tenant; conditions on a landlord are less common. However, a Tenant should strongly resist any conditions which would make operation of the break clause very difficult.
Some of the onerous pre-conditions which a Landlord may try to include are:-
- Payment of all sums due under the lease up to the break date (this would include any unpaid interest, insurance rent, service charge or anything else payable by the Tenant)
- Compliance with the Tenant’s repairing obligations under the lease
- Delivering up vacant possession
- Compliance with all of the Tenant’s covenants in the lease
The Code for Leasing Business Premises in England and Wales 2007 does not advise use of such conditions and they should never be accepted. A Tenant might at most agree to a condition they have to pay the annual rent up to the break date and a condition to deliver up vacant possession of the property free from the Tenant’s occupation or that of any Sub-Tenants. A Tenant might also agree to pay a financial penalty.
All break clauses impose specific requirements as to how the break right must be exercised e.g. notice must be served in writing at least 6 months’ prior to the break date to a specified address by recorded delivery.
If even one of the pre-conditions is not met, the break will become ineffective meaning you could be stuck with an unwanted lease for the remainder of the contractual term or with a Tenant in situ when you had other plans for your property. Early legal advice both in relation to the draft clause and the service of the break notice should be obtained.
For further information or legal advice, please contact email@example.com or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.