Exercising a break clause in a commercial lease is often one of the more contentious aspects of the landlord and tenant relationship, writes Kate Williams, partner and head of litigation, Colemans.
This is an issue which in practice can be a risky business. Expensive mistakes can be made by the unwary or unwitting.
Break clauses operate to bring a lease to an end early. For either party to be able to do this a carefully worded express provision should be included in the lease permitting it; this is the break clause. The first drafting consideration is by whom should the clause be exercisable? The landlord or the tenant, or both? Next, one must consider whether the break clause is to be exercisable at any time during the term of the lease by giving notice (a ‘rolling’ break clause) or only on a predetermined date or dates, such as the fifth and 10th anniversaries of the lease term beginning.
Typically, landlords will include in the break clause preconditions that the tenant will have to satisfy in order to validly exercise it. Commonly these are:
- payment up to date of rent (in commercial leases this often means payment of a full quarter’s rent in advance);
- payment of ‘all monies due to the landlord’ (which could include service charges or a very small amount of interest if rent has been paid a few days late in the past);
- a requirement that the there be no subsisting breaches of any tenant covenants of the lease (such as repairing covenants);
- a requirement to give ‘vacant possession’; and
- a requirement to give notice of intention to break in a particular way (notice must be given strictly in accordance with the lease provisions about service – failure to comply with what may seem like a trivial requirement could prove fatal).
These may seem straightforward but they can give rise to potential disputes after the tenant thinks it has exercised the break clause, moved out of the premises and thinks it is now ‘off the hook’ in terms of future rent and tenant liabilities.
Whether landlord or tenant, it is wise to get legal advice both when drafting a break clause and again when exercising it. Colemans’ commercial property and litigation teams are experienced in these matters and can help you avoid trouble in the future when you are ready to ‘break up’ with your landlord or tenant.