A break clause is a contractual provision in a commercial lease which allows either the landlord or the tenant to terminate early. Break clauses are often one of the most important negotiation issues in the grant of a new commercial lease.
Why tenants generally want break clauses
From a tenant’s point of view, a break clause offers flexibility; depending on how the lease is drafted the tenant has flexibility to decide on whether to terminate the lease early based on its current needs, business performance and market conditions.
Whether a tenant can realistically and successfully try negotiate a break clause depends on many factors, such as the attractiveness of the premises and general bargaining position. Where Landlords do agree, they will generally seek other concessions from the tenant.
Break clauses are often timed to coincide with rent reviews.
If a break clause is agreed there are some risks and potential pitfalls for tenants that should not be overlooked (see below)
At the other end of the spectrum, whilst a landlord will want to ensure a rental income for the duration of the lease term, a break clause might also suit a landlord where they might want to redevelop the property before the end of the lease term.
How a break clause works
The right to break may arise on one or more specified dates, or, less commonly, may be exercisable at any time during the term on a rolling basis, most commonly after a certain date. The process usually involves the service of a formal break notice on the other party, notifying them of the intended break date in the form and on the date/s prescribed by the lease.
A break clause may also include mandatory notice provisions on the service of the break notice. In the absence of such provisions, the general notice provisions in the lease will usually apply.
If a break is successfully operated, the lease comes to a end, as do all future obligations. However, whilst most breaks in favour of the tenant have conditions attached requiring full compliance with the lease terms in order to be successful, if the terms of the break do allow the tenant break whilst in breach, the break does not waive the liability for any breaches and the landlord can still pursue these. End of lease dilapidations (repair and condition on hand back) will apply in most cases in any event.
Problems and disputes over lease break clauses
A tenant planning to exercise a break clause should be very careful to check the terms of the lease well in advance, and to seek legal advice. A technical error or failing to plan ahead can in many cases we have seen result in the right being lost.
Key issues to consider and plan for include :-
- Failing to fully adhere to the conditions or process for the break clause to be valid – most leases will have a strict process, form of notice required and time period for service of notice specified. Any error, however technical or small, may well mean the lease break is invalid. Commonly these include not leaving sufficient time and not serving notice in accordance with the lease terms.
- Full compliance with lease – this is often the biggest potential trap. In order for the break clause to be valid and effective, most leases require the tenant to demonstrate that they are in full compliance with the lease. The most common problems here relate to rent payment and repair and hand back obligations.
Disputed break clauses can be costly and litigious. An alternative option for tenants may be to consider assigning (transferring) the lease to a replacement tenant or seeking some form of other negotiation with the Landlord.
We can help
If you need advice on a commercial lease, whether as Landlord or tenant, at the stage of drafting or where as tenant you are planning to exercise the break clause in your lease, we can help. We also deal with disputes arising, whether procedural, technical, or substantive. Please do get in contact.
