This blog highlights the practical issues that a tenant should consider when exercising a break clause in a commercial lease. Break clauses are a popular area for litigation as Landlords will go to great lengths to argue that the Tenant has failed to exercise it properly meaning that the Tenant remains bound by the terms of the Lease.
What is a break clause?
A break clause can be included in a lease allowing either the tenant or landlord to terminate the lease early. The act of exercising a break clause brings the lease to an end.
Depending on how the lease has been drafted, the right to break the lease may arise on one or more specified dates; or else be exercisable at any time during the term of the lease on a rolling basis.
A break clause may only be exercised if any conditions attached to it have been satisfied (for example, providing vacant possession). A break clause will be strictly construed by the courts and any conditions must be strictly performed.
Here are some practical issues for tenants to consider when exercising a break clause
- Once a break notice has been served, it cannot be withdrawn unilaterally, so a tenant must be sure that they intend to break the lease. Any mutual waiver of the notice will be deemed to constitute the grant of a new lease, which takes effect from the date of expiration of the break notice.
- Tenants should comply with all the relevant requirements in the break clause and keep evidence of their compliance to help protect their position.
- Serve the break notice in good time and strictly in accordance with the terms of the lease. If the Lease says the notice can only be printed on blue paper, print it on blue paper!!
- Keep evidence of the method of posting or delivery of the notice. If there are no service provisions in the lease, the tenant could request that the landlord acknowledges receipt.
- If the notice is being served by an agent, make sure the landlord is aware of the existence of the agency and its authority.
- Pay any outstanding sums due, even if these are in dispute. Payment can be made on a “without prejudice” basis and the matter disputed later.
- Check whether default interest may be due on past arrears. Unless the tenant has received a demand from the landlord, they may have difficulty knowing precisely how much default interest is due. Therefore, tenants should try to estimate the amount due and err on the safe side. The cost of doing so is likely to be far less than the cost of remaining bound under the lease.
- Ask the landlord for confirmation of the steps required to comply with any conditions. Ask the landlord to prepare a schedule of dilapidations in relation to any repair works. A schedule of dilapidations is a list of items that are in need of repair and that the tenant has responsibility for, due to the repairing obligations under a lease.
- If a tenant agrees to carry out works to the property before the break date, be careful to ensure that the works are completed and vacant possession is given by the break date.
- Make sure you are out of the Property before the Break Date – ‘out of the property’ includes taking all of your belongings, fixtures and fittings and any other items which might prevent the landlord from having full possession of the Property. There have been numerous cases where Landlord’s have successfully argued that the Tenant has not validly exercised the Break Clause because they have left items in the Property.
- Consider asking the landlord to accept the break notice on payment of an agreed amount as liquidated damages for any outstanding breaches of covenant. Liquidated damages are a fixed or determined sum agreed by the parties to a contract to be payable on breach by one of the parties.
- Ensure that any waiver of a condition by the landlord is not made “without prejudice” and that it is clear to which condition(s) the waiver applies.
- Get advice from a solicitor before serving the break notice to ensure that you are able to comply with any conditions. Every clause is different and failure to comply with the precise terms of the clause can have catastrophic consequences for the Tenant. As with many areas of the law, common sense goes out of the window when Courts are asked to interpret whether clauses have been exercised correctly!!