Break clauses – ‘give it a break’

Year Published: 2014

Since the doom and gloom of 2007, tenant break clauses have become ever more commonplace in lease negotiation. For the tenant, they provide flexibility and allow them to take stock of their property needs at various intervals of the lease term.

A break clause, at its simplest, is a provision in a lease which enables the landlord, the tenant, or both to terminate the lease early. Letting prospects continue to be difficult in the current economic climate and landlords remain anxious to maintain their rental income. Tenants, conscious of their stronger hand, have been looking to negotiate their leases on more favourable and flexible terms. This has lead to the tenant’s break clause becoming much more common.

Break clauses come in various forms and almost invariably have conditions placed on them. Of course, no landlord wishes to allow a tenant a ‘get out of jail free clause’ and in some cases will try to make the break clause extremely difficult to comply with. At its most simplest, a tenant will need to serve a notice to break, referred to as a ‘Break Notice’ on the landlord. This is typically in a prescribed form on six months’ prior notice. At the other end of the spectrum, a break clause may require payment of all outstanding sums due, compliance with all tenant’s covenants and ‘vacant possession’. By ‘vacant possession’, we mean everything in the premises will have to be removed including fixtures, machinery, signage and any alterations made during the term. Failure to comply with one condition, however draconian, will most probably stop a tenant from breaking the lease and this could have serious consequences financially on the tenant’s business.

Tips for tenants

  • Diarise the break date at regular intervals to ensure you don’t forget about it whilst you are busy – consider 18 months, 12 months and then 6 weeks prior to the requisite notice required in the lease;
  • Ensure you know who your landlord is and where their address for service is. This may sound simple, but throughout a 25 year term the landlord can change a number of times and the address for service can change without notice;
  • Read and understand the pre-conditions in the lease. We would always recommend taking professional advice. Particularly if the conditions are not straightforward. You will have to comply strictly with all break criteria;
  • Check the form of notice required. If there is a prescribed form, use it.

Tips for landlords

  • Keep an eye out on your tenant, its business and market trends. This will enable you to consider a tenant’s intention before it serves the notice. Be proactive and not reactive. If you think your tenant may be in the process of breaking the lease, it may be an opportunity for you to re-negotiate the terms before it serves notice and becomes dead-set on leaving the property.
  • Once the tenant has served a notice to quit, ensure that any schedule of dilapidations is prepared and served without prejudice to your ability to enforce a break condition. Ensure this is marked a ‘interim’ schedule rather than a ‘final’ schedule. Work with the tenant.
  • Always have a plan for what you will do if the tenant breaks the lease. Don’t assume that the next letting will see the same levels of demand from the same sectors as the current letting.

If you would like further information about break clauses or any other legal commercial property advice, please contact our commercial property team on 0161 475 7676.

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