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Don’t break your back over break clauses in commercial leases

16th April 2018

A break clause allows either the landlord or the tenant of a commercial property to terminate the lease early.

The terms of a break clause are strictly exercisable and so the pressure on the parties to get the drafting correct at the outset of the matter is considerable.

In this article, Staffordshire commercial property expert Matthew Easter considers the varying forms a break clause can take and the practicalities of complying with their terms and conditions.

Fixed or rolling breaks

The ‘break dates’ referred to within a break clause are those dates on which the lease can be terminated early.

These can be fixed on one or more specific dates or may roll forward throughout the term. A rolling break would allow the lease to be terminated at any point, subject to sufficient notice being given.

Whether fixed or rolling, the exercising party should pay careful attention to the period of notice which must be given to the other party and the form in which the notice should be given. If a lease includes a prescribed form of notice, then it is vital that this is used when exercising the break.

Conditions

Break clauses can be drafted so as to be mutually exercisable by either the landlord or the tenant, although it is not uncommon for the tenant to have the sole right to exercise a break clause.

Whether or not this is the case, the tenant must comply with the conditions contained within the break clause. If these strict conditions are not met, then a notice to break may be invalid and the tenant will be tied to the lease for the remainder of the term.

The Code for Leasing Business Premises in England and Wales 2007 (Lease Code) recommends that the only conditions to the tenant exercising a break clause are the following:

  • payments of the main rent are up to date;
  • occupation of the premises must be given up to the landlord on the break date; and
  • there should be no continuing sub-leases of the premises.

Parties are not obliged to produce a lease which is compliant with the Lease Code. If more burdensome conditions are included in the break clause, the tenant should reflect on whether these are fair and achievable before entering into the lease.

A common inclusion in leases not compliant with the Lease Code is a requirement that ‘vacant possession’ be given on or before the break date. In a nutshell, vacant possession means to hand over the property to the landlord in a state which the landlord can both physically and legally occupy it.

In Riverside Park Ltd v NHS Property Services Ltd [2016] a break notice was deemed invalid as partitioning erected by the tenant was left in situ following the break date. This was deemed to be a failure to meet the vacant possession condition and the tenant was liable to pay the rent for the remainder of the term – a costly mistake!

The lesson for tenants subject to such a condition is to allow sufficient time to remove all items from the property and seek a meeting with the landlord at the premises to hand over keys well in advance of the break date.

Service – practical issues

Parties must be mindful of who the break notice should be served on and how. A lease may contain additional notice provisions which clearly set this out. Nevertheless, parties should consider the following

  • Has there been an assignment of the lease or a sale by the landlord? Notice must be given to the successor in title.
  • Landlord details within a lease may be out of date. A tenant should check who the rent is paid to, invoiced by and who the registered proprietors of the property are. Consider serving notices at all known addresses and on all known parties, particularly if the individual invoicing for rent is different to those registered on the title!
  • Is it appropriate to instruct a process server? A process server can serve a notice by hand and provide proof of service. The cost involved is likely to be less than that of serving an invalid notice.

If in doubt, advice should be sought from a solicitor at the drafting stage to ensure your break clause suits your needs and, ultimately, to ensure a break notice is served correctly.

If you would like advice in relation to a break clause in a commercial lease or any other commercial property matter, please contact Matthew Easter on 01543 267910 or by email at measter@ansonssolicitors.com.

 

The contents of this article are for the purposes of general awareness only.  They do not purport to constitute legal or professional advice.  The law may have changed since this article was published.  Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.