Commercial Leases - Break Clauses
A break clause can be included in a fixed term lease to allow either the Tenant or Landlord to terminate the Lease before the end of the term. This can be a very important benefit for a Tenant, whether just starting in business or an established company, but it can be especially important during uncertain economic times. A growing or shrinking business will want to relocate to more suitable premises or a business may decide that its needs are better suited to a different location.
However, break clauses can be fraught with problems for the unsuspecting Tenant. First, there is the problem of correctly serving the Notice to break the Lease. There are very strict time limits on when to serve the notice (usually at least six months before the break date) and who to serve the notice on. Sometimes a Lease will set out the correct notice provisions or include a standard form of Notice to use but often it will not be this useful. It is very important that the notice is served correctly as if not, the right to break the lease will be lost.
The second major issue for a Tenant trying to break a Lease is the conditions attached to the Break clause. The Code for Leasing Business Premises in England and Wales 2007 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 subleases. Disputes about the state of the premises, or what has been left behind or removed, should be settled later (like with normal lease expiry)”.
However, Landlords are rarely so generous and often include strict conditions that must be met for the Tenant to effectively break the Lease. As well as the rent being up to date Landlords will often insist that the Tenant gives up ‘vacant possession’ and that there are ‘no material breaches of the lease covenants’. Vacant Possession means that the Tenant must leave the property in a state in which the Landlord can both physically and legally occupy it and give the Landlord the undisturbed enjoyment of the property. So if, for example, the Tenant left quantities of rubbish, or accidently left some goods in the property, the Landlord could argue that vacant possession had not been given and the Break is not effective. If this was upheld by a court it would leave the Tenant in the position of being liable for payment of the rent for the remaining term of the Lease.
Material breaches of the Lease covenants can also be a tricky area. The Landlord could insist that the Break is not effective if the Tenant is in breach of any of the Lease covenants. The covenant in question could be anything from not keeping the property in good repair to not cleaning the windows and the main danger is an ongoing dispute about what constitutes a ‘material’ breach. As there is no clear answer to this, it is much better from the Tenant’s point of view to resist this condition being attached to the Break clause. The Tenant can then break the Lease and deal with any breach of covenant safe in the knowledge that he/she will not be liable for the remaining term of the Lease.
A third problem is that nearly all Break clause conditions will include a provision that all the rent must be paid up to date. If the Tenant pays the rent quarterly, this means that a full quarter’s rent must be paid on the quarter day immediately prior to the Break date. This is a real bone of contention for Tenants as they argue (quite justifiably) that they should not have to pay rent for a property they no longer occupy. Unfortunately, Landlords will argue that on a strict reading of the Lease a full quarter’s payment must be paid and at the time of writing this contentious issue has not been decided by the courts. This situation can be avoided by including a rent apportionment clause with the Break clause. This compels the Landlord to refund any rent that was paid for the period after the Break date. However, if this clause is not included within the Lease, the tenant is not entitled to any refund.
Finally beware of the Landlord’s Break clause, most Tenants will not want the uncertainty that a Landlord can cut short the Tenant’s occupation of their business premises.
Break clauses are vitally important to almost any Tenant but there are various problems lurking for the unsuspecting. Ensure you take expert advice on both the drafting of the Lease and when it comes to serving the Break Notice. For more information contact Julie Hughes or Douglas Armstrong