With many business tenants currently reviewing their property requirements, Caroline Entwistle considers the exercise of commercial lease break clauses, with their traps for the unwary. You can contact Caroline on 01225 755656.
National and local lockdowns, furloughed staff, remote working, and less face-to-face customer contact are among the factors contributing to commercial tenants staring at underutilised or even empty premises. And with the pandemic proving a catalyst for permanent change in working and trading practices, for many tenants, downsizing is a clear and logical way to reduce overheads and improve cash flow. Exercising a break clause in their lease may provide their exit route.
What is a Break Clause?
Typically, commercial leases are granted for several years. While this has the advantage of providing certainty, it can also prove problematic. For example, the landlord may subsequently require vacant possession for development, or the tenant may need to relocate. With that in mind, break clauses are often negotiated and incorporated into a lease, allowing either or both parties to terminate the arrangement early. Typically, certain conditions will have to be met for the break to be effective.
Issues for a tenant to consider
Exercising a break clause may sound straightforward, but there are traps for the unwary. Before taking any steps, it is first advisable to seek legal advice. Below are some of the crucial issues to consider.
The break date
Establishing the break date is essential, not least because it will dictate when, how, and by whom specific actions are taken. The break clause may allow the tenant to:
- terminate at any time (a rolling break);
- on a fixed date or dates; or
- at any time after a specified date.
The break notice – its form, content and method of service
It is crucial to study the lease carefully as the break clause may specify the precise form and content required for the notice. The notice should be addressed to the competent landlord, with the correct address for service and this may involve making additional enquiries at the Land Registry and Companies House.
The break clause may also specify the requirements for serving the notice, for example, by which method it must be sent and when the notice will be deemed received.
Failure to comply precisely with contractual requirements for form, content, and service may render the break notice ineffective. In some cases, this may mean losing the opportunity to exercise the break if there is insufficient time to re-serve the notice if the break option can only be exercised before a fixed date.
To properly exercise a break clause, a tenant is usually required to comply with specified conditions, even a minor breach of which can result in the lease continuing. The break clause will state when these break conditions must be complied with – on service of the break notice, at the break date, or both. Among the most common break conditions is a requirement to pay all rent and other payments due under the lease. This may sound straightforward, but calculating the exact amount payable is often complicated.
A good example is where there are different methods for calculating the apportionment of rent for any part of a month, quarter or year, each giving a slightly different result.
If there is any uncertainty, the tenant’s best advice is to attempt to agree with their landlord the total sum payable. Of course, the landlord may not be overly cooperative in this exercise if they do not wish for the break right to be operated successfully. A payment of the amount that is anticipated to be payable between a rent payment date and the break date will also fall foul of a condition to have paid all rent that is payable.