Senior associate solicitor Gemma Stephenson, in our Commercial Property team, explains the potential pitfalls for commercial tenants looking to exercise a break clause in their lease.
It is long established that the terms of break clauses in leases need to be followed exactly in order for a break to be successful. Through a myriad of case law, we know that the Courts are not prepared to re-write an unfair break clause or in any way vary what was agreed between the parties – if the lease says the break must be served on pink paper, then it will not take effect if it is not, no matter how trivial the requirement may seem.
The most common issues with break clauses that we come across are:
Payment of Rent or other monies due under the lease
Historically break clauses in leases would require that a tenant pays all monies due under the lease. Such provisions are now considered particularly onerous as in the worst case, a small amount of interest due on a long past late payment of rent that the tenant wasn’t aware of could remain unpaid and frustrate the break.
Ideally a break should be completely unconditional but at very least any condition for sums due to be paid should be limited to the annual rent. Tenants need to be mindful however, that this will require the tenant to have paid all rent due for the entire quarter (or month, if the rent is paid monthly) in which the break falls. Reimbursement of monies paid for the period beyond the break date should also be dealt with in the lease as there is no automatic right to repayment.
Sometimes, a one off (break penalty) payment will need to be made in order for the tenant to exercise the break and if this applies the sum should be set out in the lease. Such sums will likely need to be paid to the landlord in cleared funds on or before the break date for the break to be effective.
It is imperative that tenants make such arrangements in advance to avoid any unforeseen issues if trying to pay monies at the last minute.
Vacant Possession and other onerous conditions
It is very important for tenants to avoid onerous break conditions where the requirements are either difficult to meet or not clear/subjective. An example of this is the requirement for ‘vacant possession’, which is now widely seen as too unclear and onerous. Solicitors acting for tenants will often negotiate instead that the property is left free of any subsisting underleases or lawful third-party occupation.
It is extremely important for a tenant that a break clause is negotiated to have minimal conditions, giving them the best chance of adhering to the requirements.
Service of the Break Notice
Service of the break notice will be dictated by the lease and the break notice must be served in the timeframe and method prescribed. It is also important to ensure it is being sent to the correct address.
Leases will provide for a period of notice, most commonly at least 6 months, whereby the notice must be served at least 6 months before the break date.
It is important that a tenant builds in time for the landlord to receive the notice after it is sent (if it is being posted), as the notice must be served or deemed served within the notice period. Service of the break notice shouldn’t be left until the last minute.
The financial implications for a tenant that fails to break a lease are often very high and usually they will not be told by the landlord until the last minute, by which point they may even have entered into a new lease. We strongly recommend that tenants seek expert legal advice at both stages of the break; on the negotiation of the lease itself to ensure that the break provisions are satisfactory and then to serve the break notice to give peace of mind that it has been served correctly and to provide confirmation of the requirements to be met in order to successfully to break the lease.
If you need advice on lease negotiations or breaking a lease, please get in touch with our expert Commercial Property team.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
