Break clauses are common features in commercial lease agreements. A ten-year lease will typically have an option for a tenant to terminate the agreement after five years.
For the landlord, a break clause is often a necessary incentive to secure a good tenant.
Tenants have the reassurance that if their business falters, or if they need to expand, they can be released from their lease agreement before the full term. The benefit of a such a clause comes at a price as invariably the rent paid for a lease with a mid-term break will be higher than one without. Unfortunately, many tenants discover that exercising the right to terminate early is not a formality and many fail, finding themselves legally committed to the lease until the end of the contracted term.
All Lease Terms May Apply
Although break clauses that require tenants to comply with all covenants within a lease are becoming less common, many still exist. Even so few exist without any conditions attached. How many tenants understand the terms of their lease in this kind of detail?
Even if the break clause simply stipulates that the tenant must be up to date with the rent and hand back the building on the specified date with vacant possession, there can still be problems. Tenants should always assume that the landlord will challenge any attempt to exercise the option to break. This means following the process to the letter so there are no grounds for the landlord for the landlord to deny its validity.
Serving Notice
How you serve notice, who you serve it to and when you serve it are all critical. Tenants cannot afford to get any detail of this wrong or they may find themselves still committed to the whole term of the lease. If the agreement stipulates registered post, this is what you must do, even if you think hand delivery is more reliable. It isn’t up to the landlord to tell you if you didn’t follow the specified procedure.
If you are planning to exercise a break clause seek professional advice well ahead of time so you are 100% clear about the process, key dates and your obligations. If you miss the date for serving notice or don’t do it properly, that may be you one opportunity gone.
Rent Payments
Tenants can unwittingly come unstuck is if the break date is mid-quarter they might assume they should pay rent up to the break date and will be fine. If the lease specifies the rent is to be paid quarterly in advance for example the landlord can legitimately refuse to accept the break.
Leave on Time
Tenants must also be out of the premises by the break date, including any equipment, furniture, rubbish etc so that the landlord has unequivocally received vacant possession. Any continued occupation which could include the presence of furniture or lightweight partitioning could be used by the landlord to invalidate the break clause.
Whether you are a landlord or a tenant, getting professional advice (such as from a specialist commercial property agent) is essential. This applies when drafting or accepting lease terms and when planning to exercise a break clause. Tenants would be unwise to seek guidance from the landlord as they have no obligation to respond let alone assist.
The cost of taking specialist advice could be insignificant against the cost of getting it wrong.
Hicks Baker are specialist commercial property agents and Chartered Surveyors. We have the professional skills and practical experience to advise landlords and tenants on all aspects of commercial property acquisition, both leasehold and freehold. For more information click here if you are a landlord, here if you are a tenant, or call us on 0118 959 6144.
