The importance of a break clause and pre-conditions

Many tenants are reassessing their business operations in the current economic climate and looking to renegotiate more favourable lease terms. In practice, a tenant who wants to exercise a break clause subject to pre-conditions may find it less than straightforward.

The presence of break clause provisions in an agreement offers a significant benefit to tenants as it allows for flexibility to react to market conditions and changing needs by terminating the lease early without having to wait until the end of the agreement date. This right can be exercised on a fixed date predetermined and incorporated into the lease.

Although the benefits of this clause may seem only one sided and disadvantageous to landlords, given the current financial climate, having such a clause in place incentivises tenants to take tenure and avoids loss of rent revenue.

Break conditions

Break conditions are usually attached alongside the break clause provisions. These pre-conditions must strictly be followed in order to successfully end the lease prematurely. Common pre-conditions are as follows:

1. The tenant is to have paid the rents due, to avoid dealing with arrears

The courts have continued to emphasise the importance of this pre-condition. As it stands, if there is no wording to the contrary, where the break date is exercised prior to the upcoming quarter day or monthly payment, it is up to the tenant to pay the full amount of the quarter or monthly day in full. The tenant cannot apportion the rent calculating to the break date.

It is important to negotiate the terms and definition of rent into the lease which is limited to the principle rent and excludes outgoings such as service charge, and insurance.

2. Compliance with the tenant covenants in the lease, in order to ensure that the premises are returned in the condition required by the lease

Where there is a subsisting breach of covenant or condition, the tenant will be unable to exercise the break clause. It is important to consult a surveyor in order to advise tenants on possible breaches of lease covenants and the works necessary to remedy these breaches. A well-advised tenant will avoid non-fault disrepairs left by their predecessors by including a schedule of condition.

It may be useful to consult with your solicitor on the preparation of a schedule of dilapidations which can be prepared by the landlord just before the break date identifying works that are required by the tenant in order to put right the property in accordance with the lease.

3. The tenant must give vacant possession

It is not sufficient for the tenant to simply vacate and give up occupation. The tenant must ensure that all fixtures, fittings and all goods are removed. The pre-condition may require the removal of any alterations made and the reinstatement of the premises.

The premises are to be given back to the landlord, free from any occupation which will interfere with the landlord’s enjoyment of the property. If required in the lease, it is vital that landlords are aware of any notices that need to be given to the tenant to reinstate such alterations.

If acting for a tenant it is important to negotiate (or ideally remove) the pre-conditions so that they are certain and objective.  The tenant is advised only to accept the following pre-conditions:

• The annual rent is up to date; and

• The tenant gives up occupation free from continuing underleases

Break notices

The break notice must be served in accordance with the terms of the lease.  There is usually a clause in the lease which deals specifically with the service of notices.

It is therefore crucial as a tenant or a landlord that you seek legal advice to avoid any ambiguity and to prevent any disputes in the event a break clause is exercised.  The tenant should also seek advice before the break notice is issued to ensure it is served correctly.

Expert legal advice on commercial property matters

If you’d like to have an initial discussion about your commercial lease, including break clause provisions and pre-conditions, please contact us. 

Our team of property solicitors in Eastbourne, Brighton, London, Hastings and Uckfield can help you understand your options.