Exiting a Commercial Lease – The Break Clause
Taking on a commercial lease is a long term commitment however, should you find yourself in a position where you no longer want to continue with the lease, an option to exit a commercial lease is to exercise a contractual break clause.
What is a Break Clause?
A break clause is a clause that can be included into a fixed-term lease. It gives the landlord or tenant (or both) the power to exit the lease early providing flexibility in changing financial climates. This could be on a particular date or a “rolling right” over a period of time such as, for example exercisable at any time on giving 6 months’ notice.
Break clauses are regulated by specific laws and 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 meticulously. 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 even worse unfit for purpose.
Rents Paid
Virtually all break clauses are conditional upon the tenant paying all of their rent due under the terms of the lease. This seems simple enough, but the case of Avocet Industrial Estates LLP v Merol Ltd 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 notice 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 within the lease.
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 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.
Parties can 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.
Commercial Lease – Further information
If you require any further advice or information on break clauses or any other Commercial Property matter, please don’t hesitate to get in touch on 0800 011 6666
January 2024