A break clause is a provision in a lease which enables either the landlord or the tenant, or indeed both, to terminate the fixed term of a lease. For tenants in particular this has been a boon during the recent challenging economic times as by exercising their break clause, they have been able to re-negotiate more favourable lease terms.
Break clauses are often the most controversial element of a lease. While exercising unconditional break clauses should be a relatively straightforward process, in circumstances where re-letting prospects are poor and they are anxious to maintain an income stream, it is normal for landlords to attach pre-conditions to the valid exercise of the break option which have to be satisfied by the break date. These conditions can be onerous and have resulted in an increase in litigation in this area in recent years. Time is of the essence in terms of complying with any time limits specified in the break clause. A failure to strictly comply with these conditions within those time limits will result in the break option not being validly exercised, with the lease (and the tenant’s obligations thereunder) continuing for the remainder of the term.
Once a break notice has been served, it cannot then be withdrawn so both landlords and tenants need to be certain of their intentions before exercising a break option.
It is vital to carefully adhere to the wording of the break clause. It may specify the precise form of notice that is to be served as well as impose requirements as to how the break notice is to be served. Any failure to adhere to those mandatory requirements will render the break notice invalid. The option to break may also arise on one or more specified dates or may be exercisable at any time on a “rolling” basis after a specified period of the term has lapsed. Either way, it is important to ensure that when the lease is drafted the break date and any required notice period are certain. It is therefore sensible to instruct solicitors in good time to draft and serve the break notice.
Insofar as attaching conditions to the break clause is concerned, these are usually to be found in tenant’s break options. The usual types of conditions attached to tenant break options include:-
- The tenant must have paid all rent(s) due under the lease. It is therefore important that the tenant checks what is reserved as rent under the terms of the lease. If interest on late payments is also reserved as rent, the tenant will have to calculate the interest due on any late payments and ensure this is paid. The tenant should also be aware that unless there is clear wording in the lease to the contrary, where the break date falls between rent payment dates, the whole of the period’s rent will need to be paid and not apportioned to the break date. Again unless there is express wording in the lease, the tenant is unlikely to be entitled to a refund for any rent paid for the period after the break date. If there is uncertainty as to what is to be paid the best solution is to ask the landlord with a view to agreeing what is to be paid.
- The tenant must give up vacant possession. This involves considerably more than just giving up occupation of the property. The tenant will need to ensure that it does nothing to indicate that it is continuing to use the property or that it is interfering with the landlord’s use or enjoyment of the property. This means that the tenant should remove any goods and, to the extent that the lease requires it, fixtures it has installed from the property. It should also ensure that keys are returned to the landlord and that no other persons (whether with the tenant’s authority or indeed otherwise) remain in the property at the break date.
- The tenant must comply with the lease covenants. Usually this is qualified so that the compliance requirement is not absolute, and requires the tenant to “reasonably”, “materially” or “substantially” comply with its obligations under the lease. Whatever the qualification, this represents a very difficult hurdle for the tenant to overcome with the covenants relating to the state and condition of the property often being the most difficult to comply with. If works are required, then it is good practice for the tenant to draw up a schedule of works or ask the landlord to produce a schedule of dilapidations well in advance of the break date so that there is sufficient time for discussions with the landlord and obtaining legal and surveying advice in relation to any issues which may arise.