Break clauses: both sides of the story

What are they?

A break clause for the purposes of this article is a clause in a commercial lease giving the tenant the right to bring the lease to an end early, subject to compliance with certain conditions. There are a number of reasons why the parties may agree to include a clause of this nature; the tenant may be a new business and require a “get out” clause in case the business doesn’t progress as anticipated, or there may be concerns on the part of the tenant that it will outgrow the premises and need the ability to move somewhere bigger.

Equally, it may be that the clause is included as a compromise between the landlord’s requirement to let the premises for a longer term, and the tenant’s requirement for flexibility. The inclusion of a break clause can satisfy the objectives of both parties, allowing the lease to continue for the full length of the agreed term unless the tenant takes positive steps to bring it to an end by exercising the break clause.

Equally, there are reasons why the Landlord may also require a break clause, and the parties may need to weigh up the implications of the other party’s break clause, before agreeing that it should be mutual.

So what does the Landlord want?

Even where the Landlord is prepared to agree to the inclusion of a break clause in the Lease, there may be arguments as to how that clause is worded. The Landlord will want the reassurance of knowing that the Tenant can only exercise the break if certain conditions are met. Few tenants would argue that the rent and other outgoings should be paid up to date, but the Landlord may also try to insist that there should be no on-going breaches of the Lease, and whilst this may sound fair, it is fraught with difficulties from a tenant’s point of view. This is because, due to the sheer number and variety of tenant’s covenants contained in the average lease, it is actually very easy to be in breach of at least one of them, and conversely very difficult to be in full compliance. This is considered further below.

The other main condition that all Landlords should be advised to include is that the tenant must give vacant possession on the break date. Again this sounds obvious, but it is more than the tenant vacating the premises; there is a multitude of case law surrounding the vexed issue of what is and is not vacant possession and the tenant will need to be careful to ensure not only that all possessions are removed from the premises on or before the break date, but also give consideration to, for example, the removal of fixtures added by the tenant during the lease.
 
But how is the tenant protected?

Few tenants will object to the conditions that the rent and outgoings should be paid up to date and that vacant possession should be given, even though the latter may be more difficult than anticipated to fulfil in practice, for the reasons set out above.

However, from a tenant’s point of view, any suggestion that the break clause should be subject to there not having been any breaches of the tenant’s obligations in the lease should be resisted.

For obvious reasons there is little point in having a tenant’s break clause if in practice it can’t be exercised, because the conditions can’t be fulfilled. Since the exercise of the break clause is subject to pre-conditions, if these are not fulfilled then the break clause is not validly exercised and the tenant is not able to bring the lease to an end early. This has obvious cost implications for the tenant as liability for the lease will continue until its end date.

The tenant also needs to take care when exercising the break, as this will need to be done through service of a notice, and the break clause may prescribe the form of the notice and/or how and when it is served.
 
In summary

Whilst the request to include a break clause is on the face of it a simple one, this is a complex area and care needs to be taken to ensure that the clause
included in the Lease meets the requirements of both parties, even if compromise is needed to achieve this. Equally importantly, both parties need to be advised as to the implications of the clause as agreed.

For further information, please contact our commercial property team on 0113 202 9550.