Break Clauses in Commercial Leases– What You Need to Know

When negotiating a Commercial Lease, one of the most important elements to consider is whether you need the Lease to contain an option to end the term early? Whether you are a Landlord or a Tenant, a break clause in your Lease is something that should be carefully considered before completing.   You also need to be aware of your obligations when it comes to exercising the break.

What is a break clause?

A break clause is a clause within a Lease that gives the option to terminate the Lease earlier than the end of the contractual term subject to fulfilling certain obligations. The ‘break date’ is usually somewhere in the middle of the lease term and requires some form of advance notice (usually 6 months) to be served in order for it to be exercised. There are many reasons that both Landlords and Tenants may want an option to break within their lease, for example, linked to a rent review in the event that the Tenant finds it cannot afford the new rent, or a Landlord simply wanting to take the property back earlier than the end of the term.

Exercising a break

A question we are asked frequently by our clients is, ‘I want to exercise my break, what do I need to be aware of?’

Clients may well think that service of a notice is a simple thing but the fact is the Courts interpret break clauses very strictly given their consequences. So whether you are a Landlord or a Tenant you have to get it right!

The first thing to consider is what the break clause stipulates needs to be done in order to exercise the break on the break date? Most leases will say that a break notice must be served 6 months before the break date and that the rent and other payments due (e.g. service charge, insurance rent) under the lease must be up to date and vacant possession given on the break date. This means having made payment even if those payments relate to a time period after the break date. As a result you would hope that the break clause contains an obligation on the Landlord to refund any such sums which relate to the period after the break date, as if it does not, there is no such obligation on the landlord to do so.

However, some leases have more onerous obligations – there must be no breach of any tenant covenant within the Lease at the break date. This is particularly troublesome. With a full repairing lease (as many commercial leases are), it is extremely difficult to satisfy this criteria as the Tenant will likely be required to keep the property in ‘good and substantial repair and condition’. You may believe that it is in good repair but if the Landlord thinks that repairs are needed, you are going to encounter difficulties.

If you are a Tenant thinking about serving a break notice and this applies to your break clause, it is a good idea to ask the Landlord to inspect the property before the break date and confirm there are no subsisting breaches that might render the break notice ineffective.  If there are, you will need to resolve these as a priority before the break date.

Service of a break notice

There is often a set form that the break notice must follow and a way in which it must be served. Most leases will have clauses dealing with the service of notices, so the address to which they need to be sent and that they should always be in writing. Failure to comply with the correct procedure could again render the break notice ineffective, resulting in the Landlord or Tenant missing the window of time to serve the break notice and having to remain in the property until the end of the contractual term. This could cause financial difficulties if a Tenant has to continue paying rent and other payments due under the Lease when it thought it could end the lease early.

It is crucial to seek legal advice before serving a break notice to ensure that you are complying with the terms of the lease. If you have an upcoming break date, or are considering the need for a break clause within your lease, please don’t hesitate to give us a call and our Commercial Property experts will be happy to assist.