Break Clauses: A Warning to Tenants

News - 24/11/2014

What is a break clause?
A break clause in a commercial lease allows either you, as the tenant, or your landlord to terminate the lease early. It provides some flexibility as, depending on how your lease is drafted, the right to terminate the lease may arise on one or more specified dates, or it may be exercisable at any time during the term on a rolling basis.

Conditions of a break clause
The right to exercise a break clause is usually conditional upon certain conditions being fulfilled, such as rents being paid up to the break date and vacant possession of the property being given on the break date.
An obligation to give vacant possession puts an obligation you, the tenant, to make the property available so that the landlord can both physically and legally occupy it and enjoy the property undisturbed.
A break clause may also be conditional upon the tenant complying with its covenants in the lease. However, as the tenant, this must be resisted as this could mean that even the smallest of breaches could prevent you from terminating the lease early. This could be detrimental if you only have a one off opportunity to terminate your lease early.

Here are a few helpful tips when considering whether to serve notice to terminate your lease
1. Once a break notice has been served it cannot be withdrawn unilaterally, so make sure that you are certain that you intend to break the lease. Any mutual waiver of the notice will be deemed to constitute the grant of a new lease, which takes effect from the date of expiration of the break notice.
2. Make sure you comply with all the relevant requirements in the break clause and keep evidence of your compliance to help protect your position such as keeping any receipted invoices for monies paid to the landlord.
3. Ensure that you serve the break notice in good time and strictly in accordance with the terms of the lease.
4. Keep evidence of the method of posting or delivery of the notice.
5. If the notice is being served by an agent, make sure your landlord is aware of the existence of the agency and its authority.
6. Consider carrying out a compliance audit with your surveyor before serving the break notice. You can then take steps to remedy any breaches in good time.
7. Pay any outstanding sums due, even if these are in dispute. Payment can be made on a “without prejudice” basis and the matter disputed later.
8. Irrespective of the break clause stating that you must pay the rent up to the break date, make sure that you pay your rent and all other sums due under the lease up  to the next rent payment date (usually the next quarter date), this is even if the break date falls just after a rent payment date just gone.  Recent case law has confirmed that if a tenant only pays up to the break date, the break notice will not be valid. Your solicitor should ensure that the lease includes a clause which puts an obligation on the landlord to repay any sums paid for periods after the break date. This should include any service charge and insurance rent as well as the annual rent.
9. Ask your landlord for confirmation of the steps you need to take to comply with any conditions. You could ask your landlord to prepare a schedule of dilapidations in relation to any repair works. A schedule of dilapidations is a list of items that are in need of repair and which you have responsibility for, due to the repairing obligations under a lease.
10. If you agree to carry out works to the property before the break date, be careful to ensure that the works are completed and vacant possession is given by the break date.
11. Consider asking your landlord to accept the break notice on payment of an agreed amount as liquidated damages in relation to any outstanding breaches of covenant. Liquidated damages are a fixed or determined sum agreed by the parties to a contract to be payable on breach by one of the parties.
12. Ensure that any waiver of a condition by your landlord is not made “without prejudice” and that it is clear to which condition(s) the waiver applies.
We recommend that you consult with your solicitor in good time before serving the break notice so that the above issues can be dealt with and service of the break notice is sent to the correct address and served in accordance with the terms of the lease.

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.