Break Clauses – Tenants Beware!
It is now very common to find that commercial property leases include a clause which gives the tenant the right to end the lease before the expiry of the agreed term of the lease. For example, a tenant agrees to enter into a 10-year lease of a shop, but negotiates an option to walk away at the end of the fifth year. This is the break clause and it gives the tenant some flexibility – and an escape route – if his business does not do well or, if he wants to move into better or bigger premises.
Landlords do not particularly like break clauses, because they remove the certainty that the premises are let for the period of the lease and if break clauses are exercised, the Landlord can find the property being handed back earlier than planned. The Landlord then finds himself looking for new tenants which in the current climate is not easy and even if a new tenant is found, the Landlord inevitably incurs costs of re-letting at best and may face a lengthy rent void as well.
Leases are invariably drawn up by the Landlord’s solicitor and if a break clause is included, it will often favour the Landlord and will be drafted in such a way that makes it difficult for the tenant to exercise the right to terminate early; if the terms of the clause are not followed to the letter the tenant can find that a Landlord can force him to stay on for the rest of the lease with all the financial consequences which that involves. A number of recent cases in the English courts demonstrate just how strictly a break clause will be interpreted and more often than not, this has been in favour of the Landlord, not the tenant. Anyone contemplating taking on any kind of commercial lease is always best advised to ask a commercial property solicitor to look over the lease before he commits to something that he may later be unable to get out of.
When break clauses first started to appear in commercial lease transactions, determined Landlords would often insist on a term making the exercise of the break conditional on a number of matters, not least the performance by the tenant of all his obligations or covenants in the lease. Given the very broad and extensive nature of these covenants (particularly as to full repair and decoration), it was usually impossible for a tenant to demonstrate 100% compliance with his obligations under the lease. If this is what the break clause required, a tenant could find that notwithstanding the inclusion of a break clause in his lease, it was virtually impossible for him to comply with the requirements and he was effectively prevented from exercising the break clause.
The wording of break clauses has evolved since the early days of their use not least because tenants’ solicitors now advise their clients not to agree any conditions relating to performance of covenants, but simply to agree that on the break date the tenant must be up to date with his rent and will hand the premises back to the Landlord. If the Landlord considers that the tenant has not performed his repair or decoration obligations, the tenant is still entitled to rely upon his break clause to end the lease, but the Landlord will still be entitled to pursue him separately for the financial losses of the tenant’s failure to meet his obligations to repair and decorate or to comply with other conditions and requirements.
Nevertheless, the payment of rent obligation can itself be a trap for the unwary. If for example rent is paid quarterly in advance on 25 March, but the break date is on 1 April, should the tenant pay rent for the last 6 days of March or for the full quarter? If the break clause does not make this clear, the tenant’s obligation is to pay the full quarter because otherwise he would be in breach of the rent payment clauses and thus could not lawfully exercise the break. A well drafted break clause would either require rent to be paid only to the break date or for the Landlord to repay any excess payment after the break had taken place.
If the tenant does not vacate the premises (and remove all his contents, equipment and other possessions) by the break date, the Landlord could refuse to accept the break, and insist upon the lease and the obligation to pay rent continuing.
All break clauses require the tenant to give notice to the Landlord of the tenant’s wish to exercise the break clause and end the lease. Usually, this is three or six months before the break date. If tenants do not give notice in time, they will lose their right to end the lease early. Tenants are well advised to diarise notice dates however far ahead to make sure that they are reminded in good time that their opportunity to end their lease is approaching, even if they are happy with the arrangements and intend to carry on with their lease. Tenants should also make sure that they are aware of any stipulations about the form that the notice must take; most leases set out how a notice should be served, for example, requiring a letter to be sent by registered post to the Landlord. A tenant who does not comply with the letter and who for example sends the notice by hand, or by plain first class post, will not be complying with the lease, and the notice will be invalid.
Break clauses are something that both Landlords and tenants should be properly advised about before a lease is signed; for the Landlord it could mean that a tenant could bring a lease to an end before the expiry of the agreed term and for a tenant it could make the difference between being able to close or expand his business. There are many traps for the unwary tenant and in our experience there are sadly many tenants who take on the liability for leases without obtaining legal advice about the wording of important clauses, particularly break clauses. In order to reduce the element of risk, it is essential that tenants take advice from a specialist solicitor who has experience of drafting commercial property leases and who can advise on the wording of a break clause or can negotiate the inclusion of such a clause if it has not been offered by the Landlord. Most Landlords’ solicitors will try to include wording which benefits the Landlord; the tenant’s solicitor must ensure that this does not give the Landlord an unrealistic or unreasonable advantage when it comes to the break being exercised. In the great majority of cases, this can be achieved.
If the tenant decides that he wants to use the break clause he must ensure that the break notice is correctly served. If there is any doubt – or just for safety’s sake – ask a commercial property solicitor to prepare and serve the notice. Remember to give him enough time to study the lease, draft the notice and get it sent off before the cut off date – do not leave it until the last day!
Tenants must make sure that any obligations on them in the break clause have been complied with – rent has been paid, the premises vacated, etc. Do not leave any necessary repair or decoration work until after the break date – if you stay in the premises, even just to carry out repairs or decoration, the Landlord could be entitled to say that the break is ineffective and that you must stay. If in any doubt as to your obligations, get advice from a commercial property solicitor well before the break date so that you know what you must do.
Overall, a tenant should never give his Landlord the opportunity of making him stay on beyond the break date. Good legal advice both as to the wording of the break clause and as to giving notice and complying with break conditions will invariably pay for itself, and reduce the risk of getting it wrong. Finally, never ask the Landlord for advice as to what you as a tenant should do – unless he has a replacement tenant waiting to take over, he has no incentive to be helpful if you are trying to walk away from the lease!
Progression Solicitors can advise both Landlords and Tenants on all aspects of leases from our Ulverston and Windermere offices.
Contact us to arrange an appointment or call 01229 580956 (Ulverston) or 015934 42255 (Windermere).
Whilst we have made every effort to ensure the accuracy of the information given in this information sheet, this information is provided for general information purposes only and no warranty or representation is made as that the information is completely free from errors or inaccuracies. Specific legal advice on this topic will vary according to individual circumstances and should be sought in every case. Any advice given in this sheet does not constitute legal advice and shall not without our express written consent in each individual case be relied upon by any person.
