A break clause in a lease does just that by permitting either the landlord or the tenant to terminate the lease early. However, exercising a break clause is rarely straightforward and there are several pitfalls which can easily scupper effective operation. This note looks takes a brief look at some of those areas:
Timing is everything
Break dates are the dates on which a lease may be terminated early. More often than not, these dates are fixed. A break clause should specify the amount of notice that must be given, which is typically six months before the relevant break date.
It is crucial that the correct amount of notice is given. Break clauses cannot be exercised retrospectively. Failure to adhere to the correct notice period will result in invalid operation of the break clause. For this reason, tenants are well advised to keep reliable diary prompts ahead of the requisite notice period affording themselves enough time to contemplate whether or not early termination is needed, and good time to prepare and serve a break notice if the decision to exercise a break clause is ultimately taken.
In deciding to exercise a break clause, it is worth remembering that the act is final. Once a break notice is served it cannot be withdrawn, even if the landlord and tenant agree to do so.
The importance of getting the timing right cannot be understated. When exercising a break clause, tenants should protect themselves by keeping records of the type of posting or delivery of the break notice. In our experience, the decision to exercise a break clause often comes late in the day and in those situations (as well as generally) we would advocate the use of a professional agent to serve notice on the tenant’s behalf. A well prepared lease will contain detailed notice serving provisions which must be complied with, so the logistics involved can be complicated.
Beware the conditions
Break clauses invariably require the tenant to comply with certain conditions in order for the break right to take effect and end the lease. It is well established by caselaw that any conditions attached to a right to break must be strictly performed. It is therefore critical that tenants resist the imposition of conditions which are likely to make exercising a break clause difficult or, in the worst case, potentially impossible.
The Lease Code 2020 (a non-binding best practice guide created by The Royal Institute of Chartered Surveyors) aims to strike a fair balance between landlords and tenants. Where break clauses are concerned, the Code recommends that tenant break options should only be conditional upon payment of rent up to the break date, and returning an empty premises to the landlord. It is fair to say that a good deal of modern leases do pay credence to the Code but equally there are many leases out there which, for a variety of reasons, do not.
The inclusion of any additional conditions should be very carefully scrutinised. Classic problem conditions include a requirement for the tenant to have performed all of its lease covenants and a requirement to deliver “vacant possession” to the landlord. The former effectively renders a break clause useless because in reality there will always be some sort of covenant breach subsisting with any lease. An unscrupulous landlord could therefore rely upon a minor breach of covenant in order to prevent the operation of a break notice.
Vacant possession is a legal concept meaning more than just empty and unoccupied. This can lead to disputes where, for example, items are left behind. In one such dispute, the Court decided that vacant possession had not been given because the tenant had left workmen on the premises to finish off some repair work. In another case, it was decided that the tenant had not given vacant possession because it had failed to remove works installed during the term of the lease, including demountable partitions.
Check the small print!
It may seem like an obvious point but in bringing about early termination of a lease a tenant will want to ensure that any money paid in advance to the landlord relating to periods after the break date is refunded. Surprisingly, tenants are not entitled to a refund unless the break clause specifically requires it. The implications of not having an express refund clause can of course be disastrous, especially if the break date falls in the middle of a rent period.
At Ward Gethin Archer, our experienced team of commercial property practitioners would be pleased to have a chat if you are a tenant entering into lease negotiations or one considering exercising a break right.
This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek our specific advice.
