Break Clauses in Commercial Leases; as a Tenant what do you need to know?
What does a break clause allow a Tenant to do?
A break clause is a clause in a fixed period lease providing both the tenant and the landlord with the option to end the lease early. As a tenant this can be extremely useful, particularly if it is a new business venture or a new branch being opened. A break clause permits a tenant to walk away from the premises if it transpires it is no longer a viable option to maintain. There are numerous reasons why this may be the case, for example; the business may be struggling, and the tenant wants to close the business down entirely, or the premises may no longer be suitable because the business has outgrown the premises.
How does a break clause work?
The break is exercised by notice e.g. 6 months, and, when the notice expires, the lease comes to an end. Depending on how the lease has been drafted, the right to break the lease may arise on one or more specified dates such as at the end of the third and fifth year or be exercisable at any time during the term of the lease on a rolling basis, for example at any time in the first five years. The notice must be served properly in the way and timescale outlined in the lease. Failure to do so can mean that the lease continues, and the tenant remains liable for rent and all other obligations under the lease.
Practical issues for a Tenant to consider when exercising a break clause.
When the tenant and landlord agree the lease, the break clause will be clearly defined within this and therefore throughout the duration of the lease it is important that the tenant keeps the clause in mind should they decide to exercise it. Below are some pointers for the tenant to consider when exercising a break clause.
Plan and Prepare
Once a break clause has been served it cannot be withdrawn. The tenant must be sure they want to terminate the lease because it can only be revoked with the other party’s consent should they wish to agree.
It is important for the tenant to keep the option of the break clause in mind throughout the duration of the lease. If the break clause option is available to action at the end of the third year and six months’ notice is required, then the tenant should seriously consider this option at the start of the second year to ensure the notice is served in accordance with the required guidelines.
In relation to this also, it is essential that the tenant serves the break notice in good time; if the date is missed the tenant loses the right to end the lease.
Be Compliant
The Tenant must ensure they serve the break notice properly as outlined in the lease. Most leases have general clauses stating how notices are to be served therefore it is important these are adhered to, to validate it. It is also important to remain compliant throughout the process, a tenant should check that they are up to date with all payments such as rent and insurance premiums, they have complied with their covenants in the Lease and also provide vacant possession of the premises on the break date.
A tenant should note that vacant possession would require you to remove anything that belongs to you such as any partitioning walls you have erected, furniture and other chattels. Failure to remove these items would not provide vacant possession to the Landlord and would not be in accordance with the break conditions.
Maintain Evidence
As a way of ensuring the correct procedures and processes have been conducted in a timely manner the tenant should document the different stages and retain evidence of dates as an insurance of serving the notice correctly in order to validate the break clause and protect themselves from falling foul of any mistakes.
What are the consequences of getting the break clause wrong?
If the break notice is served late, invalidly served or the break conditions not complied with then the lease carries on as if no notice has been served and all of the tenant’s liabilities under the lease continue as before. Getting the break wrong may be a relatively minor issue in some instances but could be hugely expensive and crucial to the business for other. How serious the repercussions are, depend on the tenant’s motivation for wanting to end the lease in the first place.
Legal advice on break clauses in a commercial lease.
The information outlined in this article is guidance of a general nature only. It is not intended to be relied upon in any given situation, so before taking any action, you should always speak to a member of Lawson-West Solicitors’ Commercial Team for specific advice. If you have any queries relating to leases, property issues or more specifically break clauses, do not hesitate to call Rebecca Beswick directly on 0116 212 1021 or Beverley Heys on 0116 212 1058 or alternatively complete our online form and we will contact you.
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