A break clause is a provision in a lease which enables the Tenant, the Landlord or both to end the lease early. It may be fixed on a certain date (or dates) during the term of the lease or it may be exercisable during the term, either after a specified date or throughout the term on a rolling basis. In today’s market, Tenants often look to exercise break clauses as part of a restructuring of their business and with Landlords keen to maintain their investment, it is no surprise that the exercise of break clauses has led to an increase in litigation between Landlords and Tenants.
Break clauses usually set out pre-conditions which Tenants must comply with in order for the break clause to be validly exercised. These include:
“The Tenant must have paid all of the rents due under the lease.”
- If the clause is drafted as above and the break date falls between quarter days then in order to comply with this pre-condition, a Tenant would have to pay the whole of the rent due for the full quarter and not the apportioned sum to the break date. Tenants should check how rent is defined in the lease. Does it include the principal rent, insurance rent, service charge and VAT? Does it include outgoings and interest too? Or is it limited to only the principal rent?
- Tenants must be up to date with all payments at the break date. For the avoidance of doubt, Tenants should ask their Landlord to confirm they are up to date.
- If any sum is disputed, it should be paid on a “without prejudice” basis and the liability for the sum argued after the break date. As otherwise the risk is that the break, will not have been validly exercised if determined by a court.
- If you are a Tenant negotiating a break clause make sure it is drafted clearly and limited to only the principal rent as recommended by The Code for Leasing Business Premises in England and Wales 2007. Ensure there is a provision for reimbursement for rent paid for the period after the break date.
“There must be no material breaches of any of the tenant covenants in the lease”
- If you are a Tenant negotiating a break clause this should not be accepted. Often Landlords will attempt to insert such a draconian condition into the lease. In practice, if at the break date, there was a breach of covenant, however minor it may be, it would prevent the break from being validly exercised. The reality is, there is always likely to be breaches of covenants in a lease and the interpretation of material is objective. The drafting should be clear and unambiguous.
- If you are a Tenant with a lease containing this pre-condition you should instruct a surveyor to ascertain and advise on any breaches of covenants and works required to remedy any breaches. Enquire and establish with the Landlord what breaches of covenants need to be remedied prior to the break date.
“The Tenant must give vacant possession of the whole of the Property”
- If you are a Tenant negotiating a break clause this should not be accepted. As recommended in The Code for Leasing Business Premises in England and Wales 2007, the Tenant should “give up occupation and lease behind no continuing subleases.” Ensure the lease is limited to this. An obligation to provide vacant possession would require the Tenant to remove all their fixtures and fittings, rubbish, belongings and any alterations.
- Ask the Landlord to confirm if any alterations are required to be reinstated. Instruct a surveyor to advise you on any works which would need to be undertaken in order to ensure vacant possession is provided on the break date.
Serving the Break Notice
If a break notice is served incorrectly by the Tenant then the break will not be valid. Tenants should:
- Diarise the break date well in advance and calculate the date by which the notice should be served by;
- Check the express provisions in the lease which deal with the services of notices. It is best practice to serve multiple notices by different methods of service including by recorded delivery to both the Landlord and their agents (if any) to ensure the notice is received; and
- Check the Land Registry and Companies House prior to serving any notices as the Landlord’s address might have changed since the Lease was granted.
Consider obtaining legal advice before agreeing Heads of Terms which deal with the exercise of a break clause. Consider instructing a solicitor to negotiate the drafting of a break clause and also serving a break notice as a failure to comply with the terms of the clause and notice requirements could be disastrous and costly for your business.
If you are looking for legal advice regarding serving a break notice on your lease, please speak to Farleys Solicitors on 0845 287 0939 or submit your enquiry online.