A break clause in a commercial lease can be vital for a tenant. Our Property team is often asked to advise on the exercise of a break clause and unfortunately, more often than not a break clause can become a litigious issue between the landlord and tenant.
It is therefore imperative that a break clause is negotiated properly and at a very early stage to avoid issues later in the life cycle of a commercial lease.
What is a Break Clause?
A break clause put simply, is an option to end a lease, either on a set date (fixed break clause) or at any time, having given the required amount of notice, if any (rolling break clause).
Usually, a break clause is subject to conditions, such conditions can include:
- The tenant has paid all of the rent;
- The tenant giving vacant possession or giving up occupation and leaving no other occupiers;
- The tenant must not be in breach of its obligations;
- The tenant must pay a sum or premium e.g. three months’ rent; and
- The tenant must hand over the original lease documents.
If a break clause is subject to conditions, unless the tenant has met those conditions any attempt at exercising the break clause will not be valid and the lease will continue. We discuss conditions, in-depth below.
Why is a Break Clause needed?
There are many reasons why a break clause may be required e.g. a landlord’s superior lease contains a break clause and it is required by the superior lease but commonly, it is to afford the tenant flexibility. Reasons the tenant may want flexibility are:
- The tenant is a start-up and may out-grow premises quickly;
- The tenant is a new venture and success is not certain;
- The tenant is unsure how long they will require the premises; and
- The rent is very expensive and the market may deteriorate and trade for the tenant may decrease
When in negotiations should a Break Clause be addressed?
A break clause should be discussed at the earliest opportunity, this is usually when concluding the heads of terms.
What conditions should I accept?
The best position for the tenant in a break clause is, of course, an unconditional break save for giving notice to the landlord. But often agents will insert standard conditions on a break clause in the heads of terms.
The Royal Institution of Chartered Surveyors (RICS) published the Code for Leasing Business Premises, England and Wales (1st edition) (“Lease Code 2020”) The Lease Code 2020 took effect from 1 September 2020.
The Lease Code 2020 addresses break clauses and say the following:
Unless the parties have agreed stricter conditions in the heads of terms, a tenant’s break should be conditional only on the tenant paying all basic rent payable on any date before the break date, giving up occupation and leaving no subtenants or other occupiers. Disputes about the state of the premises, or what has been left behind or removed, should be settled later, as at normal lease expiry.
It then goes further and says:
Leases should require landlords to repay any rent, service charge or insurance paid by the tenant for any period after a break takes effect.
It follows then that where conditions are imposed on the operation of the break clause, it should only be conditional on the tenant:
- The tenant must have paid all of the basic rent up to the break date; and
- The tenant must hand the property back leaving no subtenants or other occupiers.
Please note that condition 2 above is different from giving vacant possession. In a High Court case, a tenant had installed partitioning during the term of the lease and left this behind after it had vacated. The landlord argued the tenant had not given vacant possession. The High Court agreed with the landlord and held that the tenant had not given vacant possession of the property. Had the obligation been limited to hand the property back leaving no occupiers this point would have never arisen!
As explained in the Lease Code 2020, such matters should be handled after the termination of the lease.
A landlord may be inclined to accept less onerous conditions as it will likely go in their favour in any rent review.
Are any other clauses in a lease connected to a Break Clause?
Rent review, alienation, closure of title and confidentiality provisions are all affected by a break clause. These are beyond the scope of this article and we intend only to focus on the notice clause which we believe is the most relevant when it comes to the exercise of a break clause.
Notice clauses are usually boilerplate and deal with how one party gives formal notice to the other under any agreement. It is very important that a notice clause is clear and works, otherwise, whilst the lease has a break clause it may be impossible or extremely difficult to exercise.
Notice clauses, as a minimum, should do the following:
- Ensure that notices given under the document will come to the attention of the appropriate person or party.
- Determine how notices are to be delivered.
- Determine when notices are deemed to have been given and received.
A notice clause or indeed a break clause should not include any superfluous requirements e.g. sending a notice in the post and also sending a copy of the notice to the landlord’s lawyer or agent, to limit the risk of making a mistake.
Service of a break clause needs to be strictly adhered to and only very minor errors could be overlooked on the objective basis that a reasonable recipient would understand the notice regardless of the error.
Details such as, where a landlord consists of two people, notice should be effective by serving on one only and not both, are often overlooked.
Some notice clauses, usually in older leases, simply say that Section 196 of the Law of Property Act shall apply. This is difficult for lawyers to get right, let alone a tenant trying to operate a break clause themselves.
For the context of this article, we have only considered that any notice given must be by hand or by first class post, which is the most common methods of service.
The best-case scenario is where a lease specifies an address for service or if the party is a company incorporated in the United Kingdom, at that party’s registered office address. This is easily obtainable by searching for the company at Companies House: https://find-and-update.company-information.service.gov.uk/
Alternatively, if the party is a company not incorporated in the United Kingdom, at that party’s principal place of business in the United Kingdom or any other case, at that party’s last known place of abode or business in the United Kingdom.
Often in a lease, the landlord’s address is recited at the beginning and decided case law says where such an address is given, the party giving the notice is entitled to treat the address given in the Lease as the correct address for service and place of abode or business unless otherwise notified. The party giving the notice is not under any duty to investigate whether or not the nominated address is the receiving party’s place of abode or business.
It is then important to consider when the notice is “deemed” served. It is common to see in leases that notices shall be deemed to have been received if delivered by hand, at the time the notice is left at the proper address or if sent by pre-paid first-class post or other next working day delivery service, on the second working day after posting.
If deadlines are tight, sending the notices at the correct time is vital.
Depending on the wording of any individual lease, the decided law states that the general rule as to notices between landlord and tenant is that you exclude only one of the days and not both of them. For example, in a weekly tenancy, a notice to quit is good if given on one Friday to expire on the following Friday. A period of “not less than four weeks” is satisfied by being given on one day to expire that day four weeks, e.g., on a Friday to expire on Friday four weeks.
Using the example above, the notice must be given by hand on the first Friday or posted via first-class post on Wednesday to be deemed to have been given on Friday.
What practical steps can I take before exercising a Break Clause?
As outlined above, break clauses can be difficult to operate and the tenant must comply strictly with all relevant requirements in the break clause.
Practical steps tenants can take to avoid disputes are:
- Take legal advice, ahead of exercising the break notice.
- Keep evidence of delivery of the notice. The tenant could ask the landlord to acknowledge receipt.
- Consider carrying out a compliance audit with its surveyor’s advice before serving the break notice. The tenant can then take steps to remedy any breaches.
- Pay any outstanding sums due, even if these are in dispute. Payment can be made on a without prejudice basis and the matter argued about later.
- Make sure that any payment is made in cleared funds by the required date.
- Consider asking the landlord for confirmation of the steps the tenant needs to take to comply with any conditions.
Please note that whilst it is not considered in-depth in this article, once a break notice has been given it cannot be withdrawn unilaterally.
Summary
Some break clauses, if not correctly negotiated at an early stage or if the lease is not adequately drafted to enable operation of the break clause, can be very difficult to exercise.
If there is any discrepancy in the format of the break notice, compliance with the conditions or the serving of the break notice from what the lease prescribes, the break notice can be rendered ineffective. Simple measures such as diarising dates can assist but is it very important they you take legal advice.
If you are a tenant who is considering entering into a new lease or you are a tenant looking to exercise a break clause of your current lease, please remain aware of the difficulties which may not appear until years into the lease and if you require further advice, please contact Robert Hurst, Property solicitor at Talbot Walker LLP by email at roberth@talbotwalker.co.uk or by phone 01264 721 787 to discuss any concerns.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.