A break clause is a convenient and sometimes a ‘life-saving’ option in a commercial lease as it allows you to terminate the lease early for whatever reason.
Businesses use this option if they are going through a difficult period and experience financial issues or simply if they have found a better property for a better price. Others use it to negotiate more favourable lease terms with the Landlord, sometimes to their detriment if used incorrectly.
If you are interested to know what the break clause is or how it works in more detail, you can check out some of the previous blogs from our commercial property solicitors as this blog will focus primarily on what happens once a break clause has been exercised ‘by mistake’.
The most important thing to remember is this: once a break clause is exercised it cannot be unilaterally withdrawn. Meaning that if the tenant changes his mind and decides to stay at the property after the Break Date it will only be able to do so with the Landlord’s consent. It is possible for both parties to agree that the Break Notice is withdrawn; however, serving a valid Break Notice will mean that the lease will still automatically terminate on the Break Date. This cannot be overridden by a mutual agreement from the parties. What happens in this case is that the Landlord and the Tenant should enter into a new lease after the Break Date has come. If this is not done, the Landlord is at risk of creating a periodic tenancy which can be difficult to deal with at times as it provides various protections for a commercial Tenant.
Whilst it may seem that the above rule is unnecessary and creates the need for long winded procedures, it is there to ensure that the Landlord has certainty over matters concerning the property. It is in the landlord’s, as well as in the Tenant’s, interest to know whether the lease continues or not: the Landlord may want to start advertising the property early and the Tenant should be looking for alternative premises to move into.
If you are ever in a situation where a break clause has been exercised and then requested to be withdrawn, consider the following implications:
If a Tenant or an Undertenant exercises a break clause and withdraws it, the Landlord’s acceptance of that withdrawal will create a new lease or underlease at the end of the Break Date; This means that the Landlord may need to obtain consents from its mortgage lenders and/or any superior landlords;
The newly granted lease would not be contracted out from the Landlord and Tenant Act 1954, meaning the Tenant will have the right to renew the lease on the same terms;
Any guarantees given by a Guarantor will not be carried over to the new lease and so the Landlord would lose on the security aspect of having a Guarantor, etc.;
So what should you do if you find yourself in a sticky situation like this? Get legal advice! Do not assume that by ignoring the issue it will go away. If you are a Landlord, think carefully whether it is beneficial for you to accept a withdrawal of the Tenant’s Break Notice. If you are a Tenant – do not exercise the break clause if you merely wish to negotiate more favourable terms as you may end up terminating the lease without any right to come back to it (if the Landlord does not agree to accept your withdrawal). In commercial matters it is often about the bargaining power of the parties, and sometimes a simple implication or a threat of the break clause being exercised would be enough for the Landlord to open up to negotiations.
If you have made a mistake and exercised your break option it is not the end of the world but to ensure that both parties’ interest are represented fairly, you should seek independent legal advice. Farleys commercial property solicitors deal with various issues every day and if you are in need of assistance we will be happy to look into the matter and assist you in any way we can. You can get in touch with us on 0845 287 0939 or by completing our online contact form.