Break clauses – avoid the pitfalls when negotiating a lease

20th October 2015

A lease, by nature, is a liability on a tenant to pay the rent and comply with the covenants during the contractual term. Leases cannot be brought to an end by the tenant simply ‘walking away’. A tenant and landlord may agree to bring the lease to an early end, known as a surrender. But either party may demand a premium for this or, at the least, require their legal costs to be paid.

Alternatively, the tenant can, provided it is permitted by the lease, transfer the lease to a third party. This is known as an assignment. Otherwise, unless there is default by either party, the lease will continue for the contractual term.

When negotiating a new lease, both tenants and landlords should consider whether a break clause is required. A break clause may be useful, for example, if the landlord has plans to sell the property and does not want the sale to be subject to a lease; or if the tenant is starting a new business, the success of which is uncertain.

Emma Wells, solicitor in the commercial property team at Ansons Solicitors, explains in more detail what a break clause is, their conditions and how landlords and tenants can avoid the pitfalls.

What is a break clause?

A break clause is a provision in a fixed term lease that allows either the tenant or the landlord to terminate the lease early. The date of the ‘break’ can either be fixed, for example on the 3rd anniversary of the commencement of the lease, or rolling, such any date after the 3rd anniversary of the commencement of the lease.

Break clause conditions

Break clauses are usually subject to specific conditions with which the party terminating the lease must comply. For example, the lease may not be able to be brought to an end early unless the tenant has paid all of the rent due.

One condition that is normally included in a break clause is the requirement that notice is served by the terminating party on the other party. This is usually notice giving a specific amount of time for termination. For example, six months’ notice before the relevant break date. As break clauses normally provide that “time is of the essence”, the condition to serve notice is very strict. If notice is not served by the necessary date then the terminating party will lose their right to break the lease.

If, for example, a lease contains a break date of 31 August 2015 and it is a requirement that six months’ written notice is given, the terminating party must ensure that they serve notice by no later than 28 February 2015.

Tenants, and landlords where necessary, are always advised to make a diary note far in advance of the time period for notice to served, in order to have sufficient time to consider whether they wish to break the lease, comply with the conditions and serve the notice. It is sensible to serve notice to break a lease as early as possible.

Break clauses may also be subject to other conditions. For example the requirements to pay a “break penalty”, that there has been no material breach of covenant, or that all amounts due under the lease have been paid.

The tenant and the landlord can include any condition on the break that they can agree to. But thought must always be given to the ability to comply with the specific condition if a party wishes to bring the lease to an end early. Some conditions can be more difficult to comply with than others. For example, a condition to pay all amounts due under the lease would include the payment of interest on any payments that were made late, even if the landlord did not demand this at the time the payment was late, and it can be complex to calculate the amount of interest due.

The conditions should state whether they need to be performed on the service of the break notice or the termination of the lease, or both. If conditions need to be performed on the termination of the lease, the terminating party will need to continue to comply with the condition after the break notice is served up until the break date.

When negotiating a break clause, parties should consider what conditions will be acceptable to them. The Lease Code 2007 provides that “the only pre-conditions to tenants exercising any break clauses should be that they are up to date with the main rent, give up occupation and leave behind no continuing subleases. Disputes about the state of the premises, or what has been left behind or removed, should be settled later (like with normal lease expiry)”.

Furthermore, the Lease Code 2007 provides that if the break clause conditions do not comply with the Lease Code then the landlord must give reasons for this. The Lease Code does not need to be followed but it is a good starting point.

My advice to any tenant would be to proceed if the only conditions on breaking a lease early are that the annual rent, not any other sums, have been paid up to date and vacant occupation is given as in accordance with the Lease Code 2007. Although a tenant often has to take a view on some conditions.

Occupation v possession

One condition that is often negotiated, more than others, between the landlord and the tenant is whether the tenant will provide vacant occupation or vacant possession.

A landlord would normally require a condition that in order to break the lease the tenant must give vacant possession. This means that all items must be removed including fixtures and fittings, stock, employees, and contractors. This is sometimes difficult for a tenant to comply with. If any fixtures and fittings are left, in an extreme case even a pen, then technically vacant possession has not been given so the break clause conditions may not have been fulfilled. For this reason, tenants usually want to limit the condition to vacant occupation that includes the tenant, all employees and contractors – which is often something over which the tenant has more control.

Waiver of conditions

Conditions can be waivered by either party in writing, orally or by conduct. A landlord can waive a condition by accepting possession of the property following the break date. However, this would only be if the landlord knows all the material facts, has the right to choose whether to waive the condition, and knows the legal effect of making each choice. It is, therefore, advisable to get any waiver of a condition in writing and signed by the landlord and tenant so as to avoid future disputes.

Pit falls

Below are details of the usual pit falls that both tenant and landlord should be aware of when considering a break clause:

  • if in doubt, serve on all parties, at all addresses and consider process servers. The break clause, or another clause in the lease, will usually contain specific requirements on serving the break notice and who the notices are to be served on. These provisions must be carefully complied with otherwise the break will not be enforceable. It is important to check whether the landlord or tenant has changed, and which addresses should be used and that the addresses are correct;
  • time is of the essence so parties should ensure that they keep a note of the break dates when they complete a lease. As mentioned above, if break clause time limits are not complied with then the terminating party may lose the right to bring the lease to an end early;
  • once served, a break notice cannot be withdrawn unilaterally so the terminating party would need to be sure that they wish to bring the lease to an end; and
  • following the early termination of the lease, there is no implied obligation on the landlord to refund any overpayment of rent or other sums due under the lease. For instance, the amount paid by the tenant for the period from the break date until the next payment date. So a provision should be inserted into the lease to provide for this. This matter is being considered by the English courts and the current position is that it is not appropriate to imply a term into a lease that entitles a tenant to a refund of rent for the period after the break date. At the end of 2014, the Supreme Court granted permission to appeal against this decision.
  • A tenant should not pay an apportionment of the amounts due under the lease, for example until the break date, but should pay the full amount demanded or due, even if it is almost a full quarter’s rent, and then request repayment following the break date.

If a break clause is not complied with or a break notice is served incorrectly then this could have disastrous consequences for the terminating party. A tenant, for example, might not be able to afford to pay the rent and comply with the obligations for the remainder of the contractual term.

One last thing

The terminating party might consider:

a compliance audit, which includes a surveyor’s advice – the surveyor considers the property and the lease to see whether the lease has been complied with; or

asking the landlord to prepare a schedule of dilapidations, remembering to leave enough time for any works to be carried out before the break date, before serving the break notice. The costs of this are likely to be less than being bound for the remainder of the lease.

Finally, the party terminating the lease should instruct a solicitor to review the break clause and serve the notices.

For more details on break clauses, please contact Emma Wells on 01543 257 999 or Ansons Solicitors have offices in Cannock and Lichfield, Staffordshire.