Commercial Break Clauses in a Business Lease – What is a Break Clause?
This is a clause in a lease agreement giving the landlord or tenant or both the right, under specified circumstances, to terminate the lease agreement, before its normal termination date.
In the uncertain and competitive markets facing business tenants today, they quite rightly want to protect themselves by having some flexibility in their lease.
When negotiating a new lease therefore tenants will often seek shorter leases than was traditionally the case and to include a break clause which gives the right to terminate the lease early – at a specified point before the agreed term ends.
Whilst it is a benefit for the tenant to be able to walk away from the lease commitments without undue penalty, it is not good news for landlords. Landlords in this situation face the risk of being left with a vacant property, no rental income and paying full business rates until the unit is re-let.
Commercial premises being far more difficult to let than residential, the landlord can be faced with a void period that can last for some time.
Of course, depending on the market conditions, this flexibility can come at a cost to the tenant in terms of a higher rent, which reflects the greater commercial risk the landlord is taking.
Conditional Break Clauses:
To protect themselves, landlords often attached specific and quite strict conditions which must be met for a tenant to legally exercise a break clause.
It is common practice for landlords to include a requirement to fully comply with the tenant obligations and covenants in the lease including paying rent up-to-date, decoration, maintenance and repairs to the property, and correct service of the break notice giving a specific notice term, for example 6 months.
There is much case law concerning tenant’s break clauses and much of it shows that the courts will strictly enforce the break clause conditions spelled out in the lease. Tenants must comply fully if they are to successfully exercise the break clause.
Material Breach of the Lease:
Some break clauses may use the term “material breach” or “substantial breach” meaning the tenant must not be in breach of the lease covenants to some degree, which is in effect a relaxation of the requirement to comply fully with all the lease covenants.
A material or substantial breach exists when it is not a trivial matter, one that affects the landlord’s ability to sell or re-let without expense or delay. This will prevent the tenant exercising the break clause.
In the case of the requirement for the tenant not to be in material breach, minor breaches of repairing or decoration obligations will clearly prevent the exercise of the break clause.
Rent Payments at Break
Where there is no provision in the lease for the apportionment of rent in order to comply with the requirement for the rent to be paid up to date at lease end, the tenant would be well advised to pay the full period’s rent and apply for the return of any over payment later.
Repairing Covenants and Break Clauses:
Perhaps the most troublesome covenant for tenants contemplating a break is the obligation to “keep the property in good tenantable repair” or some similar term. Certainty is virtually impossible when faced with this definition, even if it is only a minor matter.
Time must be allowed to put the property into repair, in relation to the time limits on serving the break notice. The other option is to agree a schedule of dilapidations prior to the break notice if both parties are in agreement.
By Tom Entwistle,
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