To be economically viable for both landlord and tenant, most commercial leases run for several years at a time. However, in recognition of the fact that business circumstances may change, the tenancy agreement might contain a ‘break clause’. Tom Gibbons, commercial lawyer at Tallents Solicitors in Newark, looks at some key areas.
A break clause allows either the landlord, the tenant, or both, to end the tenancy at an agreed time, which may be much earlier than the full term of the lease.
Landlords’ break clauses can be useful where there is some prospect of redeveloping the property; landlords might want to know that they can regain possession sooner than the lease expiry date.
The added flexibility of a tenant’s break clause in a lease can help a landlord attract a tenant for their premises; there can, however, be issues for both landlords and tenants. Tenants want a break clause to be as flexible as possible, whereas Landlords would usually prefer to specify some pre-conditions with a view to restricting the circumstances in which they can be left with empty premises.
If drafted correctly, the wording of a break clause should aim to reduce the potential for disputes between landlords and tenants.
Where any pre-conditions have been attached to the break clause, full compliance with all the conditions will be required – even seemingly very minor breaches are likely to invalidate a break notice, which could risk leaving the parties unable to achieve their objectives.
By way of example, the Code for Leasing Business Premises recommends that the only conditions attached to a tenant’s break clause should be:
- – Service of prior written notice;
- – Being up to date with the main lease rent;
- – Giving up occupation of the premises on the break date; and
- – Leaving behind no continuing sub-leases.
Landlords often seek to extend the conditions to include, for instance, payment of other sums due under the lease, the giving of full vacant possession and/or compliance with the tenant’s covenants of the lease.
Picking up on some of the issues surrounding break conditions, Tom continues:
Tenants should ensure they understand exactly what is defined as ‘rent(s) due’ in the lease; this should be limited to the main rent only, but the wording of a lease might include service charges, insurance rent, VAT and any interest due on unpaid rent or rent paid late. This can be a trap for tenants, who might think they are up to date with the main rent only to realise that some other cost remains outstanding.
Where a tenant is required to give full vacant possession this may include much more than just moving out of the property and handing back the keys.
If the tenant has made alterations to the fabric of the building, then it’s likely that these will need to be reinstated as part of giving vacant possession. The tenant must also ensure that by the break date there is no intention to continue occupying the property.
Compliance with tenant’s covenants
Conditions requiring compliance with the tenant’s covenants in a lease can be particularly problematic because, depending on the wording, even what may seem an insignificant breach might suffice to defeat the tenant’s break notice.
As recently as April 2014, the Courts have found against a tenant who had served a break notice, ruling that they were not entitled to exercise a break clause in their lease as they were in breach of the repairing option when the notice was served, even though the repairs were completed by the actual break date.
Commercial leases can be fraught with issues for landlords and tenants alike. It will always make sense to consult a commercial lawyer before entering into or granting a lease, and again before serving a break notice; the costs of getting sound advice from the outset are likely to be substantially lower than the costs of having to resolve a dispute further down the line. Tallents Solicitors are here to provide clients with expert advice as required.