Don't Be Broken By A Break Clause

Break Clauses - Top Tips for Commercial Tenants

A break clause is a provision in a lease that allows a tenant to terminate their lease well before the lease expiry. Having a break clause is particularly helpful when a tenant’s business is performing poorly. Properly exercising a break in such circumstances allows the struggling tenant to walk away from their lease and escape all future rent and other leasehold liabilities.

Break clauses are not without controversy however. Historically the exercise of lease breaks has resulted in a large amount of litigation as landlords seek to contest their tenant’s attempt to break their lease. As such it’s important to get things right when it comes to break clauses. We recommend in all cases that you seek legal advice in relation to break clauses, both at the negotiation stage and well in advance of serving a break notice.

Subject to the above here are some break clause top tips for tenants;

Timing

1. Diarise the break date and the break notice period required.
2. Review your options at least 6 months before you serve the break notice; this could include seeking legal advice and speaking to a surveyor as regards your liability under the lease.
3. Allow sufficient time for the service of the break notice. Do not leave service until the last minute. 

The Break Notice

1. Check the lease to see if a particular form of break notice is required or if certain information must be noted within it.
2. Check the lease to see who the break notice is to be served upon.
3. Check the names and addresses of the parties (and any care of addresses) in the lease, at the Land Registry and at Companies House to ensure the break notice is served on the correct persons.
4. Check the “service” provisions in the lease to ensure you serve the break notice in the appropriate manner and at the correct address/es. If in doubt serve the break notice by multiple methods on the landlord and its agents (at their various addresses) and obtain proofs of service and print outs of “signed for” confirmations.

Break Conditions

1. Identify the exact conditions that need to be satisfied to exercise the break and when they need to be satisfied by.
2. It is a common pre-condition that all “rents” must be paid up to date at the break date. The key question then is how is “rents” defined in the lease? Is it limited to the principal rent or does it also include the service charge, insurance rent, VAT, outgoings and interest?
3. Check your accounting records to identify any arrears and calculate the interest (if any is applicable under the lease) you owe on such arrears. If interest on late payments is defined as one of the rents and payment of rents is a break clause pre-condition, all interest will need to be paid up to date before the break notice date. Arrears of £130 interest have been held to prevent a tenant’s break.
4. Pay all rents on time on the dates and in the manner stipulated by the lease; this may mean in the absence of receiving any invoices or demands from your landlord.
5. Pay all invoices received from your landlord as soon as they are received.
6. Ask your landlord to confirm that you are up to date with all of your payments of the rents. They are not obliged to do this unless the lease requires them to do so.
7. Ask your landlord to provide a completion statement calculated up to the break date. They are not obliged to do this unless the lease requires them to do so.
8. If any sum is in dispute, pay the whole amount on a without prejudice basis and then argue the point after the break date.
9. Check to see if your landlord is required to refund you any rents you have paid in advance of the break date for any period of time after the break date.

Vacant Possession

If a pre-condition to exercising your break is giving up the property with “vacant possession” on the break date, seek legal advice as soon as possible as to the legal definition of “vacant possession”. Giving up vacant possession means more than just giving the keys back to the landlord.

Instruct a building surveyor well in advance of serving the break notice to advise you of any works that you need to carry out to give vacant possession.

Check your lease or any license for alterations to see if you need to remove any alterations you have made to the property.

Invite the landlord to confirm what, if any, alterations they require removing. If you are not required to remove any alterations you can offer to remove the alteration/s as part of any negotiations.

If vacant possession is a pre-condition, ensure that any sublease you grant is contracted out of the Landlord and Tenant Act 1954 and that the sublease expiry date is well before the break date. All occupiers must have left by the break date.

Compliance with Lease Covenants

If a pre-condition to exercising your break is that there should be no material breach of the tenant’s lease covenants at the break date, you should carry out a lease compliance audit with your surveyor well in advance of the break date. This should flag up any breaches and the works necessary to remedy them.

Try to settle dilapidations and any other breaches with your landlord well in advance of the break date in return for an express release of any pre-conditions. The longer you leave such discussions the greater leverage your landlord will have as your time to comply with any pre-conditions will slip away.

Should you need expert legal advice regarding any of the above or indeed any other property law matters, please contact Joseph Seyed Hossein at joseph.hossein@fieldingsporter.co.uk or telephone the office nearest to you.

The contents of this article are for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.