Break Clauses in Commercial Leases – Tenants Beware!

What is a break clause?

A break clause is a provision in a lease which enables either the landlord or the tenant (or both) to end the lease early. It may arise on one or more specified dates or be exercisable during any time during the term (often after a specified period of time has elapsed) on a “rolling” basis.

It sounds simple enough, but in practice a tenant wishing to exercise a break clause which is subject to pre-conditions may find it anything but straightforward.

Landlords in today’s market and with the potential of facing an extended period of loss of rent and vacant premises will examine carefully the provisions of the break clause and seek to use the tenant’s failure to comply fully with any pre-conditions as a way of preventing the tenant from ending the lease early. It is therefore not surprising that with so much at stake, this has become a fertile source of litigation between the parties to a lease.

Notice Requirements

Sometimes a break clause will specify the precise form which a break notice must take and may impose specific requirements as to the method of service.  If the break clause does not contain express provisions dealing with the service charge, the lease should be checked carefully to establish precisely how notice must be served under the general notice provisions.

Tenants ignore the precise requirements relating to service of the notice at their peril. In Mannai Investment Co Limited -v- Eagle Star Life Assurance Co Limited (1997) AC749, Lord Hoffman stated that:

“If the [                   ] notice clause had said that the notice had to be on blue paper it would have been no good serving it on pink paper . . .”

Great care must also be taken by the tenant to ensure that the correct amount of notice is given as time is always of the essence in respect of time limits in a break clause (United Scientific -v- Burnley Corporation [1978] AC904) regardless as to whether or not this is expressly stated.

Pre-Conditions

Typical pre-conditions attached to a break clause include:-

1. The tenant must have paid all of the rents (or payments) due under the lease: A condition that the tenant must have paid all rents due may be problematic where the break date does not fall on a quarter date when rent is payable quarterly in advance as the whole of each quarter’s rent is due on the relevant quarter date. In order to comply with such a pre-condition, the tenant would have to pay the whole of the rent on the quarter date immediately preceding the break date such that the whole of the rent due up to the quarter date following the break date has been paid. Where the condition is not limited to the principle rent, it will include an obligation to pay any service charge, buildings insurance premium and other payments due under the lease. In these case,s extreme care must be taken to ensure that all payments are made in full and on time, failing which the landlord may defeat the tenant’s right to break.
2. The tenant must have complied with all of its covenants under the lease: An absolute condition such as this will prevent a tenant from exercising a break clause if there is a subsisting breach of covenant or condition at the relevant time, no matter how trivial the breach. No well advised tenant would accept such a pre-condition, as no matter how well a tenant believes that they have complied with their lease, there is always likely to be an element of breach which the tenant may not be aware of and unless it can be established from the landlord in advance what breaches need to remedied it may not be possible to comply with such a pre-condition.
3. The tenant must give vacant possession: Such a pre-condition requires the tenant to remove all of their fixtures and fittings, belongings and rubbish and to secure the departure in time of any subtenants or other occupiers. It may also require removal of any alterations made and the reinstatement of the premises so that they are returned to the landlord in the condition required by the lease. The code for leasing business premises in England and Wales 2007 (Lease Code 2007) recommends that: “the only pre-conditions to tenants exercising break clauses should be that they are up to date with any rent, give up occupation and leave behind no continuing subleases”

Tips for Tenants

A break clause is an important agreed commercial provision of a lease. The tenant, having agreed a break with the landlord at the heads of terms stage, should not be prevented by breaches of covenant or other conditions attached to the break clause.

Tenants should:-

1. Take expert legal advice before agreeing the heads of terms with the landlord’s agent and insist that the exercise of the break clause not be subject to the pre-conditions;
2. Instruct a specialist to take specialist legal advice on the negotiation of the terms of the lease;
3. If the tenant wishes to exercise the break clause the tenant must not leave this to the last minute to ensure that there is plenty of time to consider the precise requirements of the break clause and comply fully with its requirements;
4. The tenant should check carefully and note any deadlines for service of notices as well as the break date itself on completion of the lease.

Given what is at stake for tenants, taking early expert legal advice could save a lot of money and secure the immediate future of your business.