Exercising a break clause – why and when? A break clause can be included in a fixed-term lease allowing either the tenant or landlord to terminate the lease early. Some leases can include break clauses for both the landlord and the tenant. 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 be exercisable at any time during the term of the lease on a rolling basis. However, a formal notice is normally required to exercise a break clause.
A break clause may only be exercised if any conditions attached to it have been satisfied. The lease will outline these conditions, for example it may specify that the tenant must give vacant possession of the property at the date when the lease is to come to an end. A break clause will be strictly construed by the courts and any conditions must be strictly performed. Therefore, it is crucial that the tenants pay particular attention to this.
The 2007 Lease Code recommends that: “The only pre-conditions to tenants exercising any break clauses should be that they are up to date with the main rent, give up occupation and leave behind no continuing sub-leases. Disputes about the state of the premises or what has been left behind or removed, should be settled later (like with normal lease expiry).”
Although it sounds simple enough, but in practice a tenant wishing to exercise a break clause which is subject to pre-conditions may find it anything but straightforward.
Practical issues for tenants to consider when exercising a break clause
- Once a notice exercising the break clause has been served, it cannot be withdrawn. Therefore, the tenant must be sure that they want to end the lease early before serving the notice triggering the break right.
- 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 – the lease may contain provisions relating to serving the break notice that are not in the break clause itself. If the lease says 6 months’ written notice you must give a full 6 months in accordance with the notice and service provisions of the lease. Do not miss your date!
- Pay any outstanding sums due, even if these are in dispute. Payment can be made on a “without prejudice” basis and discussed later. Again, this is particularly important where such payment is a condition of the break clause..
- The tenant might not be aware of all the money it owes. The lease may oblige the tenant to pay interest in respect of late payments, so check if any such interest is due in respect of arrears in the past. The tenant may owe interest on historic arrears, even if the arrears have been cleared and the landlord has not requested the interest. Unless the tenant has received a demand for such interest, it may have difficulty knowing precisely how much interest is due, but the landlord has no obligation to tell the tenant how much interest is owed. The tenant should try to estimate the amount due and err on the safe side when paying. The cost of over-estimating the amount due for interest is likely to be far less than the cost of remaining bound under the lease. The exact amounts owed can be settled later.
- Ask the landlord for confirmation of the steps required to comply with any conditions in the break clause. In particular, the tenant may want to be sure that it has complied with its repairing obligations under the lease. In order to do this, the tenant may ask the landlord to prepare a list of items that are in need of repair, and for which the tenant is responsible under the lease. This list is known as a schedule of dilapidations.
- 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.
- Remember that there may be general obligations that apply at the end of the term of the lease, which will need to be complied with before the break date. For example, the lease may require the tenant to remove signage, reinstate alterations and redecorate the property. You should also check supplemental documents, such as any licences granted for works to the property, in case these contain obligations that are relevant to the break.
- 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 break clause condition by the landlord is not made “without prejudice” and that it is clear to which condition(s) the waiver applies.
- Do not assume that the tenant is only obliged to pay an apportioned part of sums due under the lease, for the period up to the break date. The lease may require full payment.
- If the tenant is obliged to pay any sums in advance, such as rent, service charge or insurance rent, check to see if the landlord is obliged to refund any part of those sums that can be attributed to the time after the lease ends. The tenant will not normally be entitled to a refund of rent paid in advance, unless there is an express provision in the lease to the contrary.
Landlords looking to protect their reversion and to keep their options open could also request a break clause. This suits the landlord because it can retain control of a valuable property in a shorter period of time. Importantly, any lease with a landlord’s break must be excluded from the Landlord and Tenant Act 1954 (see series 3)
Having seen from the above, a break clause is an important provision of a lease. At the head of terms stage, the tenant should not be prevented by breaches of covenant or other conditions attached to the break clause. This is why it is vital that tenants take expert legal advice before agreeing to the heads of terms with the landlord and should also insist that the exercising of the break clause not be subject to the pre-conditions
For any information on exercising a break clause, rent free periods or in assisting you in your Heads of Terms negotiations, contact the Commercial Property team.
SO Legal Solicitors Eastbourne – 01323 407555
SO Legal Solicitors Brighton & Hove – 01273 069920
SO Legal Solicitors Uckfield – 01825 729840
SO Legal Solicitors Notting Hill – 0203 9677700