Tenants beware when exercising a Break Clause

Commercial leases often contain provisions, commonly referred to as a “break clause”, allowing one (or either) party to terminate the lease early. In the current challenging economic conditions, break clauses are increasingly relied on by tenants to bring the lease to an early end. Landlords on the other hand are often keen to maintain their income stream and may look for ways to hold the tenant to the full term. This has resulted in a recent increase in litigation.

While exercising a break clause may seem straightforward at first, there are many potential pitfalls which tenants may not be aware of which could result in the break notice being defective and the tenant missing out on the opportunity to terminate the lease early. This can have devastating effects on a tenant’s business. To avoid this situation legal advice should be sought at an early stage and certainly before any notice is served.

The difficulties and requirements when a tenant exercises a break clause include the following:

Drafting the notice

The first step of course is to consider the lease carefully for any specific requirements. For example, the break clause may stipulate the exact form in which the break notice must be served in which case it is crucial that form is used. The notice should of course be addressed to the correct party and the first step is to identify the competent landlord and the correct address for service. This will usually involve checking the lease as well as the Land Registry and Companies House. If there is any doubt more than one copy of the notice should be served.

Serving the notice

When it comes to service, the break clause itself may specify how the notice must be sent and when it will be deemed to have been received by the landlord. Otherwise the general notice provisions in the lease will apply. If the service provisions are mandatory then strict compliance is essential whereas permissive provisions will give the tenant a choice on how to effect service. Due to the importance of break notices this will often demand greater certainty (compared to routine notices) and the only way to achieve this might be to hand deliver the notice to the landlord, often by a process server.

Timing

The break dates are the dates on which the lease may be terminated early. The break clause may, for example, allow the tenant to terminate the lease at any time (known as a rolling break), on a fixed date or dates, or at any time after a specified date. It is a good idea to diarise any break dates and the notice period required at the start of the lease to give sufficient time to review the position, consider different options and seek legal advice before exercising the break clause.

Break conditions

The right to exercise a break clause is usually subject to the tenant complying with certain conditions. These are known as the “break conditions”. The lease will specify whether the break conditions must be complied with at the date of service of the notice, at the break date, or both. The break conditions must be complied with strictly as even a trivial breach can result in the lease continuing. There are of course many different break conditions, all of which come with their own requirements and potential difficulties, however perhaps the most common condition is to pay all the rent or all payments due under the lease. Although it is common place, compliance can be anything but straightforward because working out the exact amount due can be complex:

1. If the tenant has ever been late paying rent then, irrespective of whether the landlord has ever demanded interest to be paid, default interest will in all likelihood have accrued and be due to the landlord. The harsh reality is that, unless this is picked up on and an amount is paid to cover any outstanding interest, the break condition will not be satisfied and the lease will continue.

2. There may also be a question of how rent should be apportioned for any part month/quarter/year and there are different methods for calculating this which will provide slightly different results.

3. It is not always appropriate for the tenant to apportion rent and the tenant may be required to pay any instalment of rent which has fallen due in full (and subsequently ask the landlord for a refund) in order to comply with the break condition.

As a tenant it is prudent to either agree with your landlord what sum, if any, is due under the lease or if that is not possible then “overpay” what you think is due and ask the landlord to refund the balance.

Expert advice is essential in order to exercise a break option to terminate a lease successfully and to avoid litigation. We have a dedicated Property Disputes Team experienced in terminating leases and dealing with any disputes which have arisen. If you need assistance exercising a break clause, or advice regarding an ongoing dispute then please do not hesitate to contact the team on 01603 610911.

Note: the content of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in any specific circumstance.