Break Clauses – Landlords & Tenants Beware!
Break Clauses – Landlords &Tenants Beware!
Most modern commercial property leases include a clause which gives the tenant the right to end the lease before the expiry of the agreed term of the lease. This is known as a break clause. This is true for leases of commercial properties in Ormskirk, Southport, Wigan and throughout Lancashire and Merseyside.
For example, a tenant agrees to enter into a 10-year lease of a shop in Southport but negotiates an option to walk away at the end of the year 5. This is the break clause and it gives the tenant flexibility – and an escape route – if the business does not do well or, if the tenant wants to move into different premises, say in a different town such as Ormskirk.
Landlords do not particularly like break clauses, because they remove the certainty that the premises are let for the period of the lease and if break clauses are exercised, the Landlord can find the property being handed back earlier than planned.
The Landlord then finds themselves looking for new tenants which, in the current economic climate, might not be and easy task and even if a new tenant is found, the Landlord inevitably incurs costs of re-letting at best and may face a lengthy void period as well with liabilities for rates, utilities etc.
When break clauses first started to appear in commercial lease transactions, determined Landlords would often insist on a term making the exercise of the break conditional on a number of factors, not least the performance by the tenant of all his obligations or covenants in the lease.
Given the very broad and extensive nature of these covenants (particularly as to full repair and decoration), it was usually very difficult for a tenant to demonstrate 100% compliance with their obligations under the lease.
If this is what the break clause required, a tenant could find that notwithstanding the inclusion of a break clause in their lease, it was very difficult for them to comply with the requirements of the break clause and they were effectively prevented from exercising the break clause they thought they had the benefit of.
Nowadays most solicitors now advise their tenant clients not to agree any conditions relating to performance of covenants, but simply to agree that on the break date the tenant must be up to date with their rent and will hand the premises back to the Landlord.
If the Landlord considers that the tenant has not performed his repair or decoration obligations, the tenant is still entitled to rely upon their break clause to end the lease, but the Landlord will still be entitled to pursue them separately for the financial losses of the tenant’s failure to meet their obligations to repair and decorate or to comply with other conditions and requirements.
All break clauses require the tenant to give notice to the Landlord of the tenant’s wish to exercise the break clause and end the lease.
Usually, this is three or six months before the break date. If tenants do not give notice in time, they will lose their right to end the lease early. Tenants are well advised to diarise notice dates however far ahead to make sure that they are reminded in good time that their opportunity to end their lease is approaching, even if they are happy with the arrangements and intend to carry on with their lease.
Break clauses are something that both Landlords and tenants, in Ormskirk, Southport and the surrounding areas, should be properly advised about before a lease is signed; for the Landlord it could mean that a tenant could bring a lease to an end before the expiry of the agreed term and for a tenant it could make the difference between being able to close or expand their business.
If the tenant decides that they want to use the break clause they must ensure that the break notice is correctly served. It is always best to ask a commercial property solicitor to prepare and serve the notice. Remember to give them enough time to study the lease, draft the notice and get it sent off before the relevant date – do not leave it until the last minute.
Tenants must make sure that any obligations on them in the break clause have been complied with – rent has been paid, the premises vacated, etc. Do not leave any necessary repair or decoration work until after the break date – if you stay in the premises, even just to carry out repairs or decoration, the Landlord could be entitled to say that the break is ineffective and that you must stay.
If in any doubt as to your obligations, get advice from one of our commercial property solicitors well before the break date so that you know what you must do.
Good legal advice both as to the wording of the break clause and as to giving notice and complying with break conditions will invariably pay for itself and reduce the risk of getting it wrong.
We have been advising Landlords and Tenants on commercial property matters in Ormskirk, Southport and across Lancashire and Merseyside for over 200 years.
If you require advice on a commercial property release, exercising a break clause or any other commercial property type matters, then please call our offices on 01695 574 201 or 01704 504381 or email us by clicking here.