What Is a Break Clause in a Commercial Lease?
A break clause is an element in a lease contract that allows the tenant to terminate the contract earlier than the original end date. They can be used when a business isn’t sure exactly what their growth plans might be, or whether the premises will be suitable for them in the longer term. It’s a useful little tool, allowing businesses to get the flexibility of much shorter leases, but without needing to seek legal advice after the short first term, and so leading to cost savings if a business decides not to break the lease. Most break clauses are tenant-side only, which means that only the tenant can trigger the break. But when a landlord also needs flexibility, break clauses can be triggered by them too.
How Much Notice Is Required to Trigger a Break Clause?
Notice: Most break clauses will need a fairly significant notice period, often set at 6 months, but it can be variable and should be negotiated at the start of the lease. Some leases have very specific requirements for giving notice, and tenants need to make sure all requirements are followed. Otherwise, the break could fail, and they would find themselves on the hook for several more years’ worth of lease costs. Not just rent, but service charges, business rates and even insurance rent.
How Do Dilapidations and Repair Obligations Affect a Break Clause?
Disrepair or dilapidations: A common thing to include in break clauses is a provision for disrepair or dilapidations. This will either require specific performance, or will leave the avenue open for a landlord to claim damages for breaches of the lease after it’s come to an end. With some break clauses, the repairing covenant can be very difficult to comply with – for example, if it requires material compliance with lease clauses or total compliance. Before signing a lease with a break clause, it’s always important to take legal advice or advice from a very experienced dilapidations surveyor, since they can help you address any pitfalls or problems you might be signing up to. Sometimes, break clauses with a requirement for a high standard of repair might as well not exist because it’s almost impossible to comply with them.
What Payment Requirements Can Cause a Break Clause to Fail?
Payment provisions: The break clause is also likely to talk about payment provisions. This includes requirements for rent to either be up to date, or maybe even the entire next quarter’s rent to be paid, rather than just the rent up until the break date. Normally, there’s a balancing sub-clause in there as well, which says that the landlord will return any overpayment within a set time period after the lease has ended. It’s important that this clause is complied with, even if it doesn’t materially affect the overall impact to the landlord after the break. That’s because the courts take strict compliance with break clauses very seriously, and again, this could mean your break fails.
There might also be provisions in there about other payments, like a break premium, which is where you have to pay additional rent to cover any additional void period the landlord might pick up. This will be agreed as a fixed sum before the lease is signed. Recently, we’ve seen a tenant be caught out by a break premium that was agreed and written into the lease, exclusive of VAT. However, the building was elected for VAT, which was not paid, and the break was therefore not validly executed.
What Does Vacant Possession Mean in a Break Clause?
Vacant possession: Finally, break clauses will often talk about requiring vacant possession of a building, though the way this works has been subtly changed since a court case involving Riverside Park Ltd and NHS Property Services Ltd in 2016. Which is why it’s often helpful to have vacant possession wording changed so that the property is required to be handed back unencumbered by the occupation of any tenants. All semantics, but potentially very important!
Why Is It Difficult to Trigger a Commercial Lease Break Clause?
At this stage, it sounds like it should be fairly simple to trigger a break clause. But that’s not always the case. Thanks to the terms and conditions attached to the break (all of which can have their own issues), we always recommend tenants seek specialist advice before doing so, either from a commercial property solicitor or a dilapidations specialist surveyor. As we mentioned earlier, the courts require strict adherence to the break clause, largely because this is a pretty much unregulated area of the law, so they aren’t normally able to imply additional clauses that might help a tenant when they’ve struggled to meet the break clause provisions.
What Happens If a Commercial Lease Break Clause Is Invalid?
Quite often, there’s no real incentive for a landlord to help, and so they might not even respond to the break notice. Especially if they think that the break clause might be invalid for any reason, as they will often wait until after the break date has passed to contact you and tell you why they don’t think the break clause is valid. If the break isn’t handled properly, then the next best way out of the lease (and to avoid paying for the remaining lease costs) is to reach a surrender agreement with the landlord. This is a position many landlords want to be in, as they tend to have the upper hand in surrender negotiations, and can often secure a strong dilapidations payment as well as a premium for allowing the surrender to happen. Of course, views on this vary from landlord to landlord, with some more sharky individuals being extremely demanding in this process, and others who have relatively undesirable properties let on a long-term basis not wanting to find another tenant. All of which leaves the tenant business in a tricky position if the break clause is missed.
What Should You Check Before Exercising a Break Clause?
Finally, it’s important to check what the provisions of the break clause relate to, and that you’re up to date with all types of rent. Within some leases, this can include interest due, so it’s useful to have a full understanding of the entirety of your lease when you’re considering what payments you need to make and when. You should never read a break clause in isolation – that’s how you miss things.
Need Help Understanding a Commercial Lease Break Clause?
If you’re considering triggering a break clause and need some help understanding what it all really means, we are more than happy to help. Just get in touch with us at Harrison Clarke, and our team of specialist dilapidations surveyors will be there to support you.
Frequently Asked Questions About Commercial Lease Break Clauses
What is a break clause in a commercial lease?
A break clause is an element in a lease contract that allows the tenant to terminate the contract earlier than the original end date.
How much notice is needed to trigger a break clause?
Most break clauses require a notice period, often set at six months, although this can vary and should be negotiated at the start of the lease.
Can a break clause fail?
Yes. If the tenant does not comply with all of the conditions set out in the lease, the break clause may fail and the lease may continue.
What is vacant possession in a break clause?
Vacant possession generally means returning the property free from occupation and in accordance with the wording set out in the lease.
Do I need to pay rent after exercising a break clause?
Some break clauses require rent and other payments to be fully up to date before the break can take effect. Some may also require payment of a break premium.
Should I seek professional advice before triggering a break clause?
Yes. Because the courts require strict compliance with break clause conditions, professional advice can help identify potential issues before the break date.
If you’re thinking about triggering a break clause, don’t leave anything to chance. Call our expert team on 023 8155 0051 for clear, practical advice. We can help you understand the conditions attached to your break clause, identify any risks, and guide you through the process to help avoid costly mistakes that could leave you tied into your lease.
For more expert advice on surveying and property matters, check out our range of informative videos on our website or YouTube channel. Harrison Clarke Chartered Surveyors is here to guide you every step of the way!
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