19 Apr 2021

Commercial Property

Negotiating a break clause within a commercial lease

Given the uncertainty in the commercial property market in recent years – and particularly since the start of the Covid pandemic - it can be a good idea to negotiate the inclusion of a break clause in commercial property leases.

As our senior associate in Commercial Law, James Young, explains, whether you are a landlord or a tenant, it is important to understand your rights and obligations when it comes to exercising this important clause.

Q: What is a break clause for commercial property?

Break clauses are a common part of the commercial landscape during negotiations of a commercial property lease. Essentially, they are clauses within a commercial property lease that enable one or both of the parties to terminate the lease before the expiry of the contractual term.

They are particularly popular with tenants who are often looking for as much flexibility in their lease as possible to allow relocation or renegotiation for more favourable lease terms, to protect their future business interests.

Q: What does a break clause look like?

Every break clause is different and it is important to read and understand yours carefully. The main types are called rolling breaks and fixed-date breaks. A rolling break usually allows the lease to end at any time on giving a certain amount of notice, whereas a fixed-date break will only permit a break on a set date so it is particularly important in these cases to get the service of notices correct.

They will usually be quite prescriptive as to what must be included in the notice, who it must be served on, how it is to be served and if there are any conditions attached to the ability to break.

Q: Do I need a break clause?

Whether you are a landlord or a tenant, your requirements for a commercial lease will largely depend upon the circumstances surrounding your business. For example, if you are a tenant, you’ll want to consider the likelihood of your business failing or expanding, as in either scenario, you may need to terminate the lease early.

Landlords will need to consider other factors such as how likely is it that you will want to sell your freehold reversion with vacant possession, or that you’ll want to take back possession of the premises at any point for yourself or to grant another lease to a different tenant.

Q: How hard is it to break a commercial lease?

Usually you cannot back out of a commercial lease as it is a commitment for the entire term. If you are having difficulties, you should discuss this with your landlord to see if they are able to help. If your lease has a break clause, you can exercise that, but remember, once you have served a break notice, it cannot be withdrawn so you should be absolutely sure that you want to end the lease.

Q: I am party to an ongoing commercial lease: can I still have a break clause?

If your lease has already completed and you do not have a break clause but wish to introduce one, you will need the consent of the other party to vary the lease. They will be under no obligation to do so but it may be that they deem introducing a break clause also fits with their commercial interests.

Q: Who should benefit from the right to break?

Some tenants may require a tenant-only break, to avoid the landlord being able to terminate the lease early, potentially jeopardising their business, while other tenants may be happy to accept a mutual break.

Mutual breaks are used less frequently in ‘protected leases’ – business leases benefitting from security of tenure, pursuant to Part II of the Landlord and Tenant Act 1954 (LTA 1954). In these instances, the landlord would also need to serve the tenant with a section 25 notice to successfully end the tenancy.

Q: What conditions can be attached to a commercial break clause?

While break clauses are clearly of benefit to the tenant, they are not always so attractive for the landlord so a set of conditions which must be strictly adhered to will usually be attached, such as:

  • The tenant must have performed all of its covenants under the lease
  • The tenant must give the property up with vacant possession/free from all third-party rights of occupation
  • The tenant must not be in material breach of its repairing covenants
  • The party exercising the break must pay a penalty

Usually the tenant is required to give adequate notice to the landlord of their intention to break the lease. The break clause may specify the precise form in which the notice must be served and impose specific requirements as to the method of service. Failure to adhere to any mandatory requirements will invalidate the notice and once it has been served, it cannot be withdrawn.

Q: Can I negotiate a financial settlement in advance of the break date?

In some instances it may be in both parties’ interests to do this as it could provide the landlord with an uplift on any dilapidations settlement for releasing the tenant from the pre-conditions, while providing certainty for the tenant that the lease will end on the break date without them having to comply with what can be very difficult pre-conditions.

 

Get in touch

Whether you are a commercial landlord or tenant, it is critical to get legal advice before entering into a new lease to agree any pre-conditions of a commercial break clause. Avoiding any ambiguity here will reduce the risk of lengthy litigation further down the line.

For existing leases, you should also seek legal advice as early as possible to ensure all the pre-conditions in the break clause have been met and to ensure compliance with the notice provisions.

Call Harding Evans’ commercial property team on 01633 244233 or email us at hello@hevans.com.

 

Share post