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Reconsidering your commercial property lease? Your break clause may hold the answer.
As UK businesses adjust to life after the pandemic, and given the growing popularity of flexible working patterns, there will be many ready to reassess their existing office or retail space and in turn the terms of their commercial leases.
For those businesses ready to make changes, whether it be smaller premises to accommodate hot-desking employees working fewer days in the office, or larger spaces due to growth during the pandemic, the break clause many will have in their lease will be their first consideration.
A break clause allows either the landlord or the tenant of a commercial property to terminate the lease early, given a pre-determined set of conditions are met. The terms of any break clause must be adhered to and are legally binding, so it is critical they are drafted correctly at the outset.
Why have a break clause?
Break clauses are inserted into commercial property leases to provide greater flexibility for landlords and tenants. A break clause allows landlords to terminate the lease and regain occupation of their property for a number of reasons, including development purposes or to attract better tenants, able to pay higher rents.
Tenants may also need to terminate a lease early, they may need more or less space or to re-locate. They are also likely to sign longer leases if they have the safety net of a break clause that allows them this flexibility, should their situation change.
Commercial leases typically run for five to ten years, so the insertion of a break clause would give either party the option to exit earlier, as long as certain requirements have been met.
The ‘break dates’ referred to within a break clause are those dates on which the lease can be terminated. These can either be fixed on a specific date or roll forward throughout the term, allowing the lease to be terminated at any point, subject to sufficient notice being given.
Recommendations and conditions
There is currently a degree of uncertainty around demand for office space, with research from global property experts CBRE, showing office investment in the first quarter of 2021 was down 65% on the previous quarter and 37% on the first quarter of 2020.
In the past tenants have been reluctant to give landlords break options, but in the current climate, they could be mutually exercisable by both parties to reflect the current commercial environment.
No matter what the circumstances the tenant and the landlord must comply with the conditions contained in the break clause. If they fail to do so, then the clause could be rendered invalid, forcing both parties to remain in the lease throughout the remainder of its term.
One aspect of break clauses that all parties must consider is that the instructions of how, when, where and to whom, the notice is served, must be followed precisely. A famous quote on this subject, given by Lord Hoffman in Mannai Investment v Eagle Star Life Assurance, states:
“If the 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”.
This statement should not be taken lightly. Tenants and landlords must be aware that a break clause will be rendered invalid if the precise conditions, outlined in the tenancy, are not met. This could mean, for example, that the notice might have to be given using a form attached to the lease and any other format will render it invalid.
Notice also needs to be served on the right person, so a check should be made to determine whether the landlord at the time the break option is triggered, is the same landlord as when the lease was originally entered into.
A check can be carried out at the Land Registry to see whether this is the case. If the landlord is a corporate entity, then the records at Companies House should also be checked to see where the landlords registered office is and where the notice should be served.
Seek legal advice early on
Whilst a break clause can have tangible benefits for the party seeking to utilise it, the process itself is far from simple. Any disagreements about whether or not certain conditions have been met could lead to expensive and time-consuming legal action.
Also, it is important to not act rashly because once a break clause has been triggered by a tenant there is no turning back. Even if both parties agree to nullify the clause, it cannot be legally revoked, so both parties must consider the issue carefully before taking such a drastic course of action.
The downturn in demand for office space means that agreeing a comprehensive break clause can be a sticking point during negotiations, so it is in the best interests of tenants and landlords to consult an experienced legal team to arrive at a mutually agreeable outcome.
If you need advice on a break clause in a commercial lease, either as tenant or a landlord, we are here to help. Please contact Chloe Ravenscroft or Lauren Hewings, Solicitors in the Commercial Property team here at Ansons:
Chloe Ravenscroft T: 01543 267233 E: email@example.com
Lauren Hewings T: 0121 716 3730 E: firstname.lastname@example.org
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