Break Clauses – Get it right first time

Many commercial leases include break clauses allowing the tenant to bring the lease to an end before the contractual term ends. These give tenants flexibility from being tied into a long term. In the recent economic downturn tenants have been attempting to exercise break clauses to release themselves from leases with upwards only rent reviews or other obligations that landlords used to be able to impose.

Some of these attempts to escape have come unstuck. Even very minor failures of no commercial value may block a break. There have been many court cases recently about whether or not break clauses have been effectively operated.

This is a high risk area for any business. If you plan to break your lease but don’t get it right you don’t get a second chance. You may be stuck for several more years with an obligation you have decided to get rid of and possibly two sets of premises. For landlords the stakes are equally high;  they and their lawyers will go over any attempt to operate a break clause with a fine toothcomb.

The Code for Leasing Business Premises in England and Wales recommends that the only pre-conditions to a tenant exercising a break clause should be that they are up to date with the main rent, give up occupation and leave behind no continuing sub-leases. In practice many older leases include other pre-conditions which can be a trap for tenants.

Any tenant considering exercising a break clause should plan ahead. The starting point is to look at the lease:

  • When is the break date ?
  • Notice will have to served – often several months in advance. What is the last date on which notice can be served?
  • Is there a specified form for the notice or is there specified information to be given ?
  • What does the lease say about serving notices? Who is to be served? Where ? How?
  • Are there any pre-conditions for exercising the break clause, and at what date do they have to be satisfied?
  • Rent will almost always have to be up to date, but that may include other payments defined in the lease as rent. Have you ever been late paying something and triggered an obligation to pay interest reserved as rent? There has been much litigation about what to do when rent is due for a period which continues beyond the break date. The basic advice is to pay everything that is due and try to get it back afterwards. The loss of a quarter’s rent is far less than being stuck with rent for several more years.
  • Is there an obligation to have complied with all the tenant’s obligations in the lease? At what date? Is that qualified by the word “material”? If not, even minor, previously unnoticed breaches may block compliance. If in doubt comply. Obligations as to the state of the premises on termination may be scattered throughout the lease. Can you identify tenant’s fixtures or alterations which you should remove? Aim to get work done well in advance of the break date and allow a margin for delays. Try to get the landlord to approve them.
  • You must give vacant possession – be very careful to do exactly that. Contractors still on site doing repairs, or even rubbish in the basement, have prevented tenants from meeting this obligation in recent cases.

Unless you are absolutely sure you understand everything you have to do get legal advice, and get it early. Deadlines for break clauses are absolute and if you miss them even the best lawyer in the land won’t be able to help you. You may be able to do a commercial deal, but from a position of weakness. With some other issues it may be possible to litigate whether you have complied or not, but this will be substantially more costly than getting early advice and getting it right first time.

Finally, when taking on new premises look carefully at any break clause – if you can’t make it unconditional, negotiate for it to comply with the Code for Leasing Business Premises.