Exiting Commercial Leases – The Break Clause

One option to exit a commercial lease is to exercise a contractual break clause. This month, I touch on some common conditions and related pitfalls.

What is a break clause?

A break clause is a clause that can be drafted into a fixed-term lease. It gives the landlord or tenant (or both) the power to bring the lease to an end early. This could be on a particular date or a “rolling right” over a period of time.
Break clauses are only actionable and valid if certain conditions are met. Those conditions must be strictly adhered to.

Common conditions

1. The tenant has complied with the notice provisions
2. All rents have been paid up to date in full
3. The tenant provides vacant possession of the premises concerned

Notice provisions

The lease will specify exactly how the parties must serve notice of their decision to break. This must be followed to the letter. The explanation in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd shows how important this is:

“if the [notice] clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.”

It is not uncommon for a poorly advised or unrepresented tenant to believe that they have correctly exercised their right to break, only to later find that they are now bound for the remainder of the term. This could leave them with premises that are unaffordable or unfit for purpose.

Rents paid

Virtually all break clauses are conditional upon the tenant being paid up with their rent. This seems simple enough, but the case of Avocet Industrial Estates LLP v Merol Ltd and another is a cautionary tale. The clause in question specified that the tenant had to pay all payments due under the lease. This included interest on late payments. The amount was trivial, but because it had not been paid the court held that the break had not been validly exercised.

Vacant possession

A break clause will usually state that the tenant must give vacant possession, although this may be implied elsewhere in lease. Again, seems simple enough, right?

In NYK Logistics (UK) Ltd v Ibrend Estates BV two workman carrying out repairs, and a security guard employed by the tenant to protect the property were still on site following the break date. The court held that the tenant had therefore not given vacant possession, and the lease continued to term.

Can I change my mind?

Whilst it could be tempting to serve a break notice as a negotiating tactic, this is could be inadvisable. This is because once a break notice has been served, it cannot be withdrawn unilaterally. This is important to protect landlords who could incur significant costs looking for a new tenant, only for the existing tenant to cancel their break. Those costs would not necessarily be recoverable.

The parties reach a mutual agreement to the break notice being withdrawn. In law, this actually constitutes the determination of the lease and the implied creation of a new lease. This peculiar aspect of law was established in the case of Tayleur v Wildin in 1868. Fortunately, this does not give rise to additional Stamp Duty Land Tax.

Commercial Lease – Further information

This month I have only been able to scratch the surface of this particularly tricky aspect of the commercial lease. If you require any further advice or information on break clauses or any other matter, please don’t hesitate to get in touch.

Matthew Light
November 2019