The practicalities of exercising or negotiating your break clause
Sometimes either a landlord or a commercial tenant will need to break a lease early. We take a look at negotiating a break clause and how they can be exercised to everyone’s satisfaction.
What is a break clause?
When drawing up a commercial lease both landlords and tenants need to consider the inclusion of a break clause which allows either party to end the lease early. The break clause is a provision within the lease which is agreed to by both landlord and tenant, when the lease can be broken, with neither party facing a penalty. It can be on a specified date or dates (usually after a specified period of time into the lease) or it can be on an ongoing or ‘rolling’ basis. Tenants must give at least two months’ notice to their landlord that they intend to break the lease. Landlords can only break the lease with the agreement of the tenant.
Tenants can end their lease early if the landlord agrees and providing they meet certain pre-conditions which are specified within the lease. Pre-conditions may include that they are up-to-date with rent and associated payments such as service charges, buildings insurance premiums etc., that they have not breached any covenants within the lease, and that they must give vacant possession as well as reinstating the premises to the condition it was in when they took possession. Tenants may be able to pass the lease onto someone else, or sublet whilst still being responsible for paying the rent. In some circumstances tenants may be able to pay a ‘break premium’ instead of complying with all the covenants.
When negotiating a lease, tenants should think ahead and make provision for the possibility of exercising a break clause which may include pre-conditions. Naturally, landlords may be reluctant to include a straightforward break clause, for the simple reason that they may face a period of vacancy and associated loss of earnings. It is, therefore, vital that tenants consult an experienced commercial lawyer before signing a lease which insists on stringent pre-conditions in relation to the break clause and consult them on any negotiations relating to the terms of the lease.
They should also ensure that, if they wish to exercise the break clause, they give their landlord sufficient notice, both to understand fully the precise terms of the pre-conditions (if any exist), but also to ensure that they are fully compliant with any requirements within the clause.
The exercising of break clauses is one of the most common causes of legal disputes between landlords and tenants and it can prove an expensive exercise for both parties. It is in your own best interests, therefore, to seek legal advice at negotiation stage with a landlord to ensure that the terms of the lease are reasonable and not skewed too far in their favour, should you need to exercise a break clause.
If you need specialist advice about a break clause within a commercial lease, talk to a member of our team. Our experienced negotiators can offer you confidential and current guidance and assist with the interpretation of any clauses which are causing concern.
Written by: Steven Jones on Monday 29/05/2017