How to get the best out of my break clause
In changing times for businesses, any flexibility a tenant can build into a commercial lease is likely to have lasting benefits both to mitigate risks and enable businesses to seize on opportunities. Tenant break clauses have long given Tenants flexibility to terminate their leases at fixed times to obtain beneficial terms from Landlords, downsize to smaller properties, or find larger premises to facilitate expansion.
The law on break clauses has changed a lot in the past decade and we’re now seeing clauses and conditions that were once readily agreeable by tenants now being an onerous burden for tenants who have agreed such clauses in the past.
Sounds nasty. What’s happened?
It was common for break clauses to contain usual conditions required by a landlord that a tenant would have to comply with in order to exercise their break. There has been a lot of case-law on these conditions recently and the conditions have been interpreted strictly. Notably:
- Vacant Possession: A tenant who left non-demountable partitions did not give vacant possession of the property, meaning that the break was not correctly exercised and the tenant was stuck in the lease. Vacant possession is strictly interpreted against the tenant and tenants must be very careful to ensure that everything and everyone is out of the property on the break date.
- Comply with Lease Agreements: No tenant under any lease is fully compliant with all the lease agreements. The property is rarely in full repair when a tenant is in occupation. As such, for a tenant to comply they must take all reasonable steps to put the property in repair, spend considerable amount of money and take professional advice. That’s a very high burden for a tenant just to exercise their break clause.
Tenants should also be aware that the date on which the break notice must be served – usually a few months before the break date – is absolute. Once that date is missed, the break is no longer exercisable. Also, the break notice must be in exactly the form required by the lease. If the lease states that the break notice must be ‘in writing, on pink paper, fragranced with two squirts of Chanel No.5’ then that’s exactly what the tenant has to do.
So, what can I do to help my business?
We advise the following steps:
- When negotiating your lease, you require your agent to accept no conditions to the break clause save for ‘give up occupation’, ‘ensure rent is up-to-date’ and that there are no subsisting sub-leases. Also, require the Landlord to agree that any overpayment of rent – i.e. for that period after the break date – will be repaid to you. The landlord is under no obligation to return any rent paid relating to the period after the break date;
- Diarise your break date and set reminders well in advance of the date by which the break notice must be served. If you are going to serve your break notice, ensure that you instruct your agent or your solicitor in good time so that the break notice is received by the landlord prior to the date by which the notice must be served;
- Pay your rent! If you’ve served your break notice, ensure you pay your rent for the entirety of the period for which you’re required to pay for under the lease, together with VAT, service charge and insurance that may be owing. It’s usual for rent to be paid quarterly, so ensure you pay the full quarterly amount. Failure to do so will mean that you will not be able to terminate on the break date.
- Review your lease and find out what conditions are required to be fulfilled in order to legally exercise the break. Gregg Latchams strongly advise that you seek legal advice in respect of your obligations and we’d be happy to advise.
Important stuff, then?
A tenant break clause is a major benefit for a tenant and it’s important that you retain the right granted and that you’re clear on what’s required to take benefit of the break clause. In new leases we will always advise you on and attempt to negotiate down the conditions of a break clause. This process is far easier and more cost effective for you if you’ve already negotiated the conditions before instructing a solicitor. Get in early, save money, protect your business and give yourself the best chance to take opportunities in the future.
For more information, get in touch with us on 0117 906 9400 or firstname.lastname@example.org