Does the break clause which you expect to end your ongoing property costs for one of your retail stores actually work? If it is subject to one or more conditions then the answer may be no!
When a draft lease is issued, a retailer often finds that the break clause contains conditions, which must be satisfied in order for the break clause to be effective. Examples may include conditions requiring you:
- To comply with the repairing obligations in the lease
- To hand back the store with vacant possession on or before the break date
- To have paid all the rent or other payments due under the lease,
- To have performed all the retailer’s covenants in the lease.
A failure to satisfy any condition to the letter of the law makes the break clause void, and therefore the preferred course of action is for the break clause to be totally unconditional. However, if the conditions cannot be negotiated out in their entirety then close attention must be paid to the precise drafting to ensure that you are able to validly exercise its very valuable break option. If you accept any conditions, then it must be crystal clear as to what needs to be done to satisfy those conditions, and the satisfaction of those conditions must be totally within your control.
For example, a condition requiring the yearly rent and VAT on it to be paid up to the break date is acceptable, as a retailer you know exactly what sum needs to be paid to satisfy the condition and it is entirely within your control to make the requisite payment. Contrast this with the situation where the condition also requires the insurance rent to be paid up to date. You are dependant on the landlord notifying you of the required sum and what if the demand for this sum arrives the day before the break date? Do you have the internal systems in place, which enable the payment to be made immediately, so as to keep the break clause alive?
Conditions requiring compliance with covenants, particularly repairing covenants, are a minefield for retailers. How does a retailer know with any certainty that the repairs they have carried out to a store are sufficient to satisfy the conditions requiring the property to be in good repair at the break date, when the level of repair is so subjective and a retailer and landlord will frequently have differing views of what is required?
However, even if you do find yourself in a situation where their lease contains a heavily conditional break clause, all is not lost. With some careful guidance and planning it may still be possible to navigate a safe path through the condition and ensure the break clause is effective.
As a final note, where landlords seek to introduce break clause conditions, retailers should remind them that the new Code for Leasing Business Premises in England and Wales 2007 (endorsed amongst others by the RICS and the British Property Federation), states that "the only pre-conditions to retailers 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)".