Break clauses in commercial leases – tips for landlords10 Nov 2016
A break clause in a fixed-term lease gives the landlord, or the tenant, the option to terminate a lease early. Break clauses are often put in a lease at the request of either one of the parties and can only be exercised by the party with the benefit of the break. The break can be exercised on a specific date as agreed between the parties in the lease, or on a rolling basis (i.e. at any time provided the criteria for exercising the break are met).
Break clauses are usually looked at more favourably by tenants, who may want the option to end a long lease early. However, a break clause can also beneficial to landlords through giving them the flexibility of knowing that they can end the lease early if, for example, they wish to relocate or wish to develop the entire property.
If the clause has not been drafted correctly, the party seeking to rely on it may not be able to use it. The most common reasons why break clauses cannot be used include: missing the deadline for service of the break clause, notice being served on the wrong entity, and the tenant not complying with the conditions attached to the break clause.
Service of break clauses
The first step in serving a break notice is to check what the lease says. Notice to break can sometimes be required 12 months before the break date, though six months is a more common notice period. Serving the notice at the wrong time will mean that the break clause cannot be triggered by the party seeking to rely on it.
The lease should also be checked to see how the notice should be served, as a specific form may be required. Failing to serve it in the correct form is likely to invalidate the notice.
A surprisingly common occurrence is that notice is served by, or on, the wrong person. In particular, care should be taken when serving notice on companies (parent/subsidiary), landlords (immediate/superior) and tenants (original/current). Service on the incorrect party generally means that the break notice will not be valid. As a landlord, you should check whether the notice has been served on the correct party. If you are serving notice on a tenant and are in any doubt as to who is the current tenant, it is sensible to serve the notice on all possible tenants. Whilst only one notice will be valid, this should provide some comfort to the landlord serving the notice.
Conditions attached to a break clause
A well-drafted break clause that will benefit the landlord should set out the conditions that must be complied with before notice can be served. Common conditions that landlords may wish to consider including in the break clause are:
• All rent being paid;
• All covenants being performed; and
• Vacant possession being provided.
However it’s important to note that not all of these conditions will necessarily be agreed by the tenant.
A landlord wishing to oppose a break operated by a tenant should check that all the conditions have been complied with before confirming acceptance of the validity of the notice. Note that recent case law confirms that a clause requiring all rent to be paid means that rent should be paid up until the next payment date – even if the break date falls just after a rent payment date just gone. However, the lease may require that any sums owed to the tenant are to be repaid by them.
The conditions may be ‘absolute’ or ‘qualified’. How they are drafted will affect how strictly the tenant needs to comply with them.
These are just a few of the pitfalls to look for. There is a wealth of case law regarding the construction of break clauses and we recommend that specialist legal advice is sought in this complicated and highly litigated area.