How to Avoid the Pitfalls of Break Clauses

Recent years have seen an increase in litigation when it comes to disputes over the validity of break clauses and so obtaining professional advice from a solicitor, such as our team here at Bennett Griffin, is essential whether you are a commercial landlord or leasing commercial premises.

What is a Break Clause?

 A break clause is an arrangement in a lease, which allows either the landlord or the tenant (or both) to end the lease early.

The renting out of commercial property is often a substantial financial commitment – to both the landlord and the tenant. It is in the interests of the landlord to maintain the income they can get from property, whilst a tenant will want to avoid being locked in for too long as their business may change and they might look to downsize to save money. Alternatively, a landlord might need break clauses if he or she wishes to redevelop the property or sell it before the end of the term of the lease.

It is, therefore, in the interests of both landlord and tenant to ensure that they understand break options when entering into new leases and what they must do to exercise those options, should the need arise.

Activating a Break Clause

There are various different issues with break clauses, and they all have implications which differ according to whether you are the landlord or tenant – serving a break notice, timing, break conditions and the exit agreement.

Serving a Break Notice

A party that wishes to exercise its break option (“the serving party”) will need to ensure that the notice to be served on the other party (“the receiving party”) exercising the break option is properly served on the receiving party in accordance with the terms of the lease. The notice is often referred to as a break notice.

The serving party will firstly need to ensure that the form of notice complies with the terms of the lease. Some leases will specify that a specific form of notice is used in which case the notice served must follow the same form otherwise it will be invalid.

The serving party will need to ensure that the notice is served on the correct receiving party at the correct address. The serving party may need to carry out some research to ensure this point is complied with, e.g. checking the Land Registry title of the receiving party and/or Companies House records where the receiving party is a company to check their name and address for service.

The serving party will also need to ensure that the notice is served by the correct method of service, e.g. post, personal delivery, recorded delivery, fax, etc. Please note that leases often preclude service by electronic means including email.

Timing

The serving party will need to give the right amount of notice. Leases often stipulate when a notice served by a particular method will be deemed to have been received by the receiving party. As such, it may be that the serving party will need to build in extra days’ notice for notice by, for example, the postal service.

Break Conditions

If the break option is stated in the lease as being conditional upon a certain event occurring or obligations having been complied with, then it is essential the conditions are met. A current run of case law indicates that the courts are of the view that, if a condition is not strictly complied with, no matter how minor the non-compliance, this will render a break notice invalid.

Tenant break conditions usually include the provision that the tenant must have paid up all of the rents due under the lease and must give vacant possession of the premises back to the landlord on the break date.

It is advisable for the tenant to ask the landlord sufficiently far in advance of the break date if all the sums due have been demanded and ask for written confirmation of this. Unless the lease states otherwise, the tenant will not be entitled to any refund of rent which falls due before the break date but relates to a period after the break, e.g. where quarterly rent is paid in advance. As such, it is advisable for the tenant to ensure that there is a specific provision in the lease requiring the landlord to refund any advance payments on the break date.

For vacant possession, tenants should be fully aware of the extent of their obligation. This typically means ensuring that no one remains in occupation of the premises on the break date including any subtenants and that all of the tenant’s fixtures and goods have been removed and the keys have been returned to the landlord (or someone acting on behalf of the landlord).

Exit agreements/settlement

The parties should discuss a “without prejudice” exit agreement which takes into account the condition the premises is left in (which covers dilapidations), the settlement of any claims and the waiver of any conditions.

Break clauses are complex; so if you do not want to end up involved in an expensive litigation case, contact our expert team of solicitors here at Bennett Griffin on 01903 229999.