What is a break clause in a commercial lease?

What is a break clause in a commercial lease?

The pandemic brought lasting and dramatic change to the UK’s commercial property market. Hybrid and remote working were already on the rise, but successive lockdowns accelerated that shift dramatically. That has led to an increased requirement for flexibility, with business owners reassessing their workspace needs and wanting more freedom to adapt to market changes.

Subsequently, interest in short-term commercial leases has soared, but that’s not the only way to get the flexibility many business owners now crave. Break clauses in commercial leases also have a part to play.

Here we discuss what a break clause in a lease is, how it works and your considerations when negotiating a break clause as a commercial landlord or tenant. 

What is a break clause in a lease?

A break clause is a contractual provision sometimes included in commercial leases. It allows the landlord, tenant or both to terminate the lease before it reaches the end of its fixed term. By activating a break clause, either party can give notice to exit the lease without the financial penalties and legal consequences that would otherwise apply.

To use a break clause, you must give the appropriate notice specified in the lease and meet any other conditions, such as paying outstanding rent by a certain date. Failing to follow the lease’s terms to the letter can invalidate the break clause. In that case, the lease will continue until the end of its term or the next break date.

Break clauses typically arise at one or more fixed points throughout the term of the lease. For example, a three-year commercial lease may include a break clause every 12 months. However, some leases allow break clauses to be exercised on a rolling basis at any time as long as the required notice is given. 

Why include a break clause in a lease?

Including break clauses in a commercial lease gives businesses more flexibility to adapt to their changing workplace requirements. It could be that the business’s growth has surpassed expectations and needs to expand into larger premises, or it intends to offer flexible working practices which will reduce its requirement for floor space.

From a landlord’s perspective, break clauses are typically less advantageous. However, they can make a property more attractive to prospective tenants, particularly given that flexibility is high on many tenants’ lists of priorities. They also provide some protection against tenant breaches and give landlords more freedom, for example, if they decide to sell or redevelop the property.  

Can you withdraw a break clause?

Once you have activated a break clause, there is no legal mechanism to withdraw it. Even if your circumstances change or both parties agree to cancel it, it will remain in effect. The only solution is to draw up a new lease.

That’s why it’s so important to consider the implications very carefully and always seek professional advice so you can be sure you want to break the lease before you serve notice. 

Factors to consider when negotiating a break clause

Mutual or one-way

Break clauses are usually included in commercial leases to benefit tenants, but as a landlord, you may wish to make the break clause mutual.  

Timeframes

Both parties should consider the earliest date they may need the option to terminate the lease. You must also agree on the intervals when the break clauses can be exercised and whether they’re fixed or rolling. 

Notice period

The break clause will specify how much notice either party must give if they intend to terminate the lease. A typical notice period for a commercial lease is between three and six months. As a landlord, you’ll need time to find a new tenant, while the tenant must secure an alternative workspace. It’s also important to set out how the notice should be served to avoid disputes about its validity.   

Conditions

The primary point of contention in break clause negotiations is usually the conditions that both parties must meet for the break to be valid. Common conditions include who can exercise the break clause, how you exercise it, and obligations to make repairs and pay any outstanding rent.

Landlords sometimes insist on more wide-ranging obligations if they are resistant to the inclusion of a break clause, which can lead to disputes. Both parties must ensure the wording of the conditions is clear and know whether the conditions must be satisfied on the specified break date or when the notice is served.

The benefit of professional advice

Engaging a professional with specific experience in commercial leases can ensure fair and enforceable break clauses that protect your interests. At Eddisons, our lease advisory service can guide you on every aspect of your lease agreement, from renewals and exits to subletting and rent reviews. Find out more about our UK-wide service and get in touch to arrange a free, same-day consultation with our team.