Commercial leases often contain provisions, commonly referred to as “break clauses”, allowing one (or either) party to terminate the lease early. The break may occur on a specific date or at any time, subject to a certain amount of notice.
In an uncertain and challenging market, the ability to get out of a commercial lease early, will be invaluable to a tenant as this will give the tenant the flexibility it wants and needs to react to market conditions and changing needs.
Yet, on the other hand, for a landlord struggling to find suitable and solvent tenants, allowing a tenant to extract itself from the obligations of a lease early, can be particularly damaging.
As a result, landlords may not always make it easy for a tenant to exercise its right to break and are likely to impose a number of conditions on a tenant in order for a break to be successful. Typical conditions may include:
- service of a notice in a given timescale;
- payment of ‘all sums due’;
- giving vacant possession of the property;
- compliance with tenant covenants (including repair obligations).
If those break conditions are not followed to the letter, the tenant will not have successfully exercised the break and will find itself tied into the lease for the remainder of the term. That is likely to have significant and unwanted financial consequences.
Before agreeing to conditions to exercising a break clause, the tenant should make itself aware of what they might mean. Some pointers are given below:
- Payment of “all sums due” – perhaps one of the most common conditions, it may sound fair and easy to comply with but it is not always straightforward. The obligation could include not only the annual rent reserved, but any other monies payable under the lease such as insurance and service charge contributions, VAT, interest etc.
A tenant should consider (among other things):
Has there ever been any late payments? If so, irrespective of whether the landlord has demanded interest, default interest is likely to have accrued and will be due to the landlord. Unless this amount is known, and is paid before the break date, a condition requiring the tenant to have paid ‘all sums due’ will not have been satisfied. A tenant should try to ensure that there is an obligation on the landlord to notify the tenant of any outstanding sums before the break date or make payment limited to only those which have been formally demanded.
Has the rent been paid in full? Even if a break date falls on, or just after the next rent payment date, a tenant must ensure it pays the full amount of rent due under the lease on the rent payment date. Apportioning the rent up to the break date will not satisfy a condition of this nature. To make sure that any monies relating to a period after the break date are returned to the tenant, an express clause ordering the repayment of any funds which relate to time after the break date should be included in the lease.
- Compliance with lease terms – a condition requiring a tenant to comply with all its repair obligations or ‘all tenant covenants’ should also be avoided. This is because a landlord will find it easy to find fault with the repair of a property (however minor) and argue that a break is invalid. It is also inevitable that there will be a breach somewhere along the line.
- Giving vacant possession – an obligation to give vacant possession is equally as onerous. To satisfy such a condition, the premises must be free of all chattels and alterations – leaving something as innocuous as a mug could potentially render an ineffective break. Vacant possession does not simply mean leaving the property empty, but can extend to ensuring no alterations that may affect the landlord’s use and enjoyment are left behind. Leaving partitioning in place, for example, may result in a break being void.
- Serving notice – tenants should also take care to ensure a break notice is served on the current landlord and strictly in accordance with the lease provisions relating to service of notices.
In summary, break clauses require careful drafting and consideration. They can be the subject of extensive and involved negotiations. Tenants and landlords looking to enter into a new lease which incorporates a break clause should always take the advice of a specialist commercial property solicitor.
To discuss this further or any other commercial property requirements, please contact the Commercial Property Team on 020 8943 1441 or contact Lily Meyer directly on 020 8614 4590 or email [email protected]. For more information on Commercial Property please click here.
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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.