Break Clauses: A Tenant’s Guide

A break clause or break option serves the function of allowing one or both of the parties to bring the term of a lease to an end prematurely. Whilst not all landlords will be willing to give a tenant the option of terminating the lease early, a break clause is seen as beneficial by many tenants, particularly of new businesses, as it provides flexibility in the event that the business encounters difficulties.

Such break clauses tend to take one of two forms, either a ‘rolling break’ or the ability to break on a fixed date.

A ‘rolling break’ will allow the party with the benefit of the break option to terminate the lease at any time or at any time after an agreed date.

A break on a fixed date is just that. The lease will set out the specific date or dates upon which the party with the benefit of the break option may terminate the lease.

It is usual for the party exercising the break option to be required to give notice to the other party. Consideration of the wording of such notice provisions is important. If the party exercising the break is required to give six months’ notice then exactly six months’ notice is required (taking into account the provisions in the lease relating to service of notices), not one day more or less. If the notice provisions are not adhered to, exercise of the break may be deemed to be invalid. If a new lease is being negotiated, it would be prudent to agree that the period of notice is expressed to be “at least” a certain period of time (for instance, at least six months). This lessens the risk of the exercise of the break option being declared ineffectual due to inadequate notice having been given.

It is important to note that, once served, a notice exercising the break option cannot be withdrawn without the agreement of the other party.

Many modern leases impose conditions on the ability of a tenant to exercise a break option. Whilst these conceivably could take any form, there are a few common conditions which landlords tend to attempt to impose. These are discussed below. Clearly, the best position for a tenant would be for the break option to be unconditional, however, whether this can be negotiated will depend on the relevant bargaining strength of each of the parties.

a) The tenant is to pay all of the annual rent under the lease.

This appears on the face of it to be straightforward but tenants should bear in mind that if such a condition is included, the tenant must pay all of the annual rent which becomes due prior to the break date. Therefore, if a quarter’s rent is due the day prior to the break date, the tenant must pay the entire quarter’s rent, notwithstanding that it will only be in occupation of the premises for a day. Whether the balance of the quarter’s rent is to be returned to the tenant will depend upon the precise wording of the break clause.

If a new lease is being negotiated, any attempt by the landlord to specify that the break option shall be conditional upon “all sums due under the lease” being paid should be resisted. There is a possibility if such a provision is agreed that the tenant may find the exercise of the break invalid due to a minor sum being due to the landlord of which it was potentially unaware.

b) The tenant is to give vacant possession of the premises on the break date.

Again, this seems to be fair and reasonable but a number of cases have found that vacant possession was not given where a premises was not empty of people at the break date [1] or chattels (contents, equipment and so forth) belonging to the tenant [2] (in such instance it was demountable partitioning which had been installed by the tenant and that the court considered was unique and of specific benefit to the tenant).

Unless it can be agreed that the condition can be deleted in its entirety, a preferable provision, which imposes a lesser burden on the tenant, is that found in the Code for Leasing Business Premises in England and Wales 2007, namely that the tenant is to give up occupation of the premises.

c) The tenant must have complied with the covenants of the lease.

To agree to this would be unwise and tenants should be wary about accepting an assignment of an existing lease containing such a provision. It is very difficult, some might say even impossible, to comply, and have complied, with all of the covenants of a lease, particularly those relating to repair and decoration. Accordingly, if the break clause contains such a condition, there is a strong possibility that the break option will be inoperable.

Thankfully, whilst such a provision may be contained in the landlord’s initial draft lease, the majority of landlords will agree to dispense with such a provision.

If a break clause is being negotiated when taking a new or renewal lease of a premises, it is prudent to specify any conditions to which this break option shall be subject in the heads of terms, so as to avoid any potential dispute during the drafting stage.

For more information, please contact Jeremy Pow or Thom Wilkinson on 020 7404 7001 or at jeremy.pow@mww-llp.com or thom.wilkinson@mww-llp.com.

 

[1] NYK Logistics (UK) Ltd v Ibrend Estates BV (2011)

[2] Riverside Park Ltd v NHS Property Services Ltd (2016)

By |2018-08-24T14:37:11+00:00June 14th, 2018|Latest, News/Blog, Property|Comments Off on Break Clauses: A Tenant’s Guide