Breaking point: how to exercise a commercial break clause

A break clause allows a landlord, tenant or both to terminate a commercial lease before the end of its contractual term. It offers valuable flexibility, but a break right must usually be exercised strictly in accordance with the lease. Errors in a break notice, or failure to satisfy a condition, may leave the lease continuing and the parties bound by their obligations for the remainder of the term.

The exercise of a right to break a lease is a frequent source of disputes between landlords and tenants, so care needs to be taken from the outset. This article explores the steps that should be taken before notice is served and what should happen afterwards.

Serving a valid break notice

Before a break notice is prepared and served, the lease should be reviewed carefully to establish:

1. who is entitled to exercise the break
2. when the break date is and what notice period applies
3. whether there is any required form and wording for the notice
4. where, how and on whom the notice must be served
5. any conditions that must be satisfied for the notice to be effective

Once the party exercising the break is confident they can meet the required conditions, the notice should be prepared in accordance with any requirements set out in the lease.

The identities and addresses of the current landlord and tenant should be verified against the lease, the registered titles, any assignments or changes of name and, where applicable, Companies House records. Failure to serve a break notice on the correct person will render the notice invalid. Likewise, a notice served by the wrong person will also be invalid.

Break notices will often need to be served within a strict timeframe, failing which the right will be lost, so notice should be served well before the deadline. The lease may contain provisions on deemed service and these must also be taken into account.

Finally, the notice must be served using the methods permitted by the lease, and evidence of service should be retained in the event that the validity of service is later challenged.

Common conditions of a break clause

Once a break notice has been served, the serving party should ensure that all conditions of the break are complied with by the break date. Some of the common conditions attached to tenant break clauses are as follows.

1. Payment of sums due

A break may be conditional on payment of rent, or all sums due under the lease such as service charges, by the break date. Tenants should obtain an up-to-date account and settle the relevant sums in good time, even where an amount is disputed.

If rent is paid quarterly in advance and the break falls part-way through a quarter, the tenant may need to pay the full quarter for the break to be effective. Unless the lease expressly provides otherwise, the tenant may not be entitled to recover rent relating to the period after termination.

2. Vacant possession

A tenant wishing to exercise a break will need to give up vacant possession of the property by the break date. This generally means the landlord must be able to assume immediate and exclusive possession from that date. The tenant should ensure nothing remains in the property that would prevent the landlord from making use of it, and that all keys and access devices are returned.

3. Compliance with covenants

A condition requiring compliance with all tenant covenants is particularly onerous, as minor repair, decoration or reinstatement breaches could put the break at risk. Where a tenant is subject to such a condition, it is important to obtain independent advice from a building surveyor at an early stage, so that the requirements can be met and evidence of compliance documented.

Tenants should also be aware that termination under a break clause does not usually release them from liabilities arising before the break date. The landlord may still pursue claims for disrepair, failure to decorate or failure to reinstate alterations, even where these are not conditions of the break. The tenant should therefore review its obligations, any licences for alterations and any schedule of condition ahead of the break date, as this may reduce a subsequent dilapidations claim.

Landlord break clauses

Extensive conditions are less likely to be attached to a landlord's right to break. A common condition, however, is that the landlord must intend to redevelop the property.

A landlord should also consider whether the tenant has security of tenure under the Landlord and Tenant Act 1954. A contractual break does not, by itself, remove the tenant's potential right to a new lease. If the tenant has security of tenure, the landlord will also need to follow the statutory procedure for ending the lease and establish a ground for opposing renewal.

A warning

Any party wishing to exercise a break clause should consider it extremely carefully. Once a break notice has been served it cannot be withdrawn, even with the agreement of the other party.

This can have significant implications. If the tenant remains in occupation following the break with the landlord's agreement, this will amount to a new lease with effect from the break date. That lease will not be contracted out of the Landlord and Tenant Act 1954 and its terms are likely to be unclear.

If the parties agree that the tenant should remain in occupation notwithstanding service of a break notice, the best way to ensure certainty for both sides is for the terms of a new lease to be prepared and to take effect immediately after the break date.

Conclusion

A break clause is only valuable if it can be exercised effectively. Early planning, strict compliance with the lease and clear evidence of service and handover are essential to avoid an ineffective break and the continuation of unwanted lease liabilities.

How Ansons can help

If you would like advice on serving or responding to a break notice, please contact Louise Palmer on 01543 267231 or by email at lpalmer@ansons.law. Alternatively, get in touch with the team at your nearest office.

Contact us to speak with a member of our Dispute Resolution team.

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This article is for general information only and does not constitute legal advice. If you have a specific query, please contact us directly.