Break clauses are common in commercial leases. The opportunity to end a business lease early is useful to both commercial tenants and landlords, but whether your break notice will be valid depends on whether you have strictly observed the break clause requirements.
We recommend you consult with a commercial property lawyer in good time before serving the break notice, so the issues highlighted in the article can be dealt with.
Here we’ll be covering:
What is a break clause?
A break clause in a commercial lease can be included in a fixed-term lease allowing either the tenant or landlord to bring the lease to an end early. The terms of the break clause and who can exercise it, will depend on negotiations at the Heads of Terms stage. Sometimes the break clause is personal to the original landlord or the original tenant or both of them.
Depending on how the lease has been drafted, the right to break the lease may:
- arise on one or more specified dates;
- be exercisable at any time during the term of the lease on a rolling basis, such as on three months’ notice expiring at any time.
A break clause may only be exercised if any conditions attached to it have been satisfied.
Examples of pre-conditions often attached to break clauses
Some examples of pre-conditions often attached to break clauses are as follows:
- The tenant must have paid all the rent, or all payments due under the lease
- The tenant must have performed all its covenants
- The tenant must not be in material breach of its repairing covenants
- The tenant must give vacant possession (or that the tenant gives up occupation and leaves behind no continuing underleases)
- The landlord must have an intention to redevelop the property
- Any underlease is to be contracted out of the Landlord and Tenant Act 1954.
The break clause should specify whether the conditions must be satisfied at the date the break notice is served, or at the specified break date, or both. If any pre-conditions are not strictly complied with, the right to break may be lost.
The relationship between a break clause and other provisions of a lease
Break dates are often linked to rent review dates so that, if the tenant considers a rent increase to be too great, they can bring the lease to an end early. As time is of the essence for the break clause (where strict observance of timescales is required), such a link will generally also make time of the essence in relation to any time limits in the rent review clause.
If a headlease is terminated by the exercise of a break clause of either party, then any underlease also ends. This applies even where the underlease was granted with the consent of the head landlord. However, if Part II of the Landlord and Tenant Act 1954 applies to the underlease so that it is a protected tenancy, a statutory tenancy for the undertenant will arise on the termination of the underlease.
There may be general obligations that apply at the end of the term of the lease, which will need to be complied with before the break date. For example, the lease may require the tenant to remove signage, reinstate alterations and redecorate the property. Reviews of any supplemental documents should also be made, such as any licences granted for works to the property, in case these contain obligations that are relevant to the break.
A tenant may ask the landlord for confirmation of the steps required to comply with any conditions in the break clause. In particular, as a tenant you will want to ensure that you have complied with your repairing obligations under the lease. In order to do this, you may ask the landlord to prepare a list of items that are in need of repair and for which you are responsible under the lease. This list is known as a schedule of dilapidations.
If a tenant agrees 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.
A tenant will also want to ensure that any waiver of a break clause condition by the landlord is not made ‘without prejudice’ and it is clear to which condition(s) the waiver applies.
Break clauses and payment requirements
Considerations on payments connected to break clauses should include the following:
- pay any outstanding sums due, even if these are in dispute. Payment can be made on a ‘without prejudice’ basis and discussed later
- interest in respect of late payments may be payable. There may also be interest due on historic arrears, even if the arrears have been cleared and the landlord has not requested the interest. It is safer to over-estimate the amount due for interest. The exact amounts owed can be settled later
- make sure that payments are made in cleared funds by the required date, unless the landlord has expressly agreed to accept a cheque
- don’t assume the tenant is obliged to pay only an apportioned part of sums due under the lease, for the period up to the break date. The lease may require full payment
- if the tenant is obliged to pay any sums in advance, such as rent, service charge or insurance rent, check to see if the landlord is obliged to refund any part of those sums that can be attributed to the time after the lease ends. The tenant will not normally be entitled to a refund of rent paid in advance, unless there is an express provision in the lease to the contrary
- consider asking the landlord to accept the break notice on payment of an agreed amount as liquidated damages for any outstanding breaches of covenant. Liquidated damages are a fixed or determined sum agreed by the parties to be payable on breach of a lease obligation by one of the parties.
When and how to give notice for a break clause
As a tenant you will want to consider carrying out a compliance audit with a surveyor’s advice before serving the break notice. You can then take steps to remedy any breaches of the lease. This is particularly important where such compliance is a condition of the break clause.
You should serve the break notice in good time and strictly in accordance with the terms of the lease. The lease may contain provisions relating to serving the break notice that are not in the break clause itself. If there are two or more tenants, usually the break clause must be exercised by all of them.
Keep evidence of the method of posting or delivery of the notice. If there are no provisions in the lease that relate to serving the break notice, the party serving the notice could request that the receiving party acknowledge receipt, although the receiving party is not obliged to comply with that request.
If the notice is being served by an agent, make sure the receiving party is aware of the existence of the agency arrangement and the agent’s authority.
Once a notice exercising the right to break the lease has been served, it cannot be withdrawn. Even if the landlord and the tenant both agree to waive the break notice, this does not prevent the lease from ending. Instead, such an agreement between the parties will be deemed to constitute the grant of a new lease that will take effect immediately after the original lease ends under the break clause.