Break clauses are a common part of the commercial landscape during negotiations of a commercial property lease. Whether you are a landlord or tenant, it is important to understand your rights and obligations when it comes to exercising a commercial break clause.
What is a commercial break clause?
A break clause is a provision in a commercial lease which enables either the landlord or the tenant, or both, to end the lease early. In today’s competitive commercial property market, tenants want as much flexibility in their lease as possible to allow them to relocate or re-negotiate more favourable lease terms in order to protect their future business interests.
Landlords’ break conditions
A break clause is clearly of benefit to the tenant, however is not so attractive for the landlord. In order to protect themselves, landlords will usually attach conditions to a commercial break clause which must be strictly complied with by the tenant. Typical conditions imposed by landlords include:
- The tenant must have paid all of the rent(s) due under the lease
- The tenant must give up vacant possession and not leave behind any continuing sub-leases
- The tenant must comply with all tenant’s covenants in the lease. This usually includes repairs to the property
Failure by the tenant to comply with the break conditions will result in them losing their right to break the lease.
Conditions of the Notice
Usually the tenant is required to give adequate notice to the landlord of their intention to break the lease. The break clause may specify the precise form in which the notice must be served and impose specific requirements as to the method of service. Failure to adhere to any mandatory requirements will invalidate the notice. Once the notice has been served it cannot be withdrawn.
It is therefore advisable for commercial landlords to maintain close relationships with their tenants to try to establish what their intentions are before the notice is served as there may be an opportunity to re-negotiate terms.
Settlement of a commercial break clause
In some instances it may be in both parties’ interests to negotiate a financial settlement in advance of the break date. This could provide the landlord with an uplift on any dilapidations settlement for releasing the tenant from the pre-conditions, and it will provide certainty for the tenant that the lease will end on the break date without them having to comply with what can be very difficult pre-conditions. Seeking early legal advice as to whether this is appropriate for you is a must.
Where there are joint tenants to a commercial property lease, a commercial break clause can only be fully exercised by both tenants, unless there is a specific provision in the lease stating that this will not be the case. However, if one tenant has the authority to exercise it on the behalf of the other, then this will be permissible.
It is critical to seek legal advice before entering into a new lease to agree any pre-conditions of a commercial break clause. These conditions must be clearly stated in the commercial lease, as should the precise break date and required notice period. Avoiding any ambiguity here will reduce the risk of lengthy litigation further down the line.
For existing leases, again, seek legal advice as early as possible to ensure all the pre-conditions in the break clause have been met and to ensure compliance with the notice provisions.
Whether you are a commercial landlord or tenant and need further advice or assistance with exercising a commercial break clause, we would be pleased to hear from you. Call 0115 985 3450 or get in touch here.