Break clauses in commercial leases – a practical guide for tenants

11 Oct 2015

This note highlights some practical issues that a tenant should consider when looking to exercise a break clause in a commercial lease. 

What is a break clause? A break clause can be included in a fixed-term lease allowing the tenant (or the landlord) to terminate the lease early. Depending on how the lease has been drafted, the right to break may arise on one or more specified dates or at any time on a rolling basis.

A break clause may only be exercised if any conditions attached to it have been satisfied (for example, payment of rent or providing vacant possession). A break clause will be strictly construed by the courts and so any conditions must be fully performed. 

Practical points for tenants to consider when exercising a break clause

  • Once a break notice has been served it cannot be withdrawn unilaterally so a tenant must be sure that they really want to break the lease. Any mutual waiver of the notice will be deemed to constitute the grant of a new lease which takes effect from the date of expiration of the break notice.
  • Tenants should comply with all the conditions in the break clause and keep evidence of compliance to help protect their position.
  • A break notice should be served in good time and strictly in accordance with the terms of the lease. Evidence of the method of posting or delivery should be obtained.
  • Any sums due under the lease should be paid, even if these are in dispute. Payment can be made on a “without prejudice” basis and the matter disputed later. It is important to check whether default interest may be due on past arrears. If the amount is not known, tenants should try to estimate the amount due and err on the safe side. The cost of doing this is likely to be far less than the cost of remaining bound under the lease because the break is rendered ineffective.
  • The landlord should prepare a schedule of dilapidations in relation to any repair works. If a tenant agrees to carry out works to the property before the break date the works must be completed and vacant possession given by the break date.

If you are unsure about any aspects of your break clause, contact me at tom.trowbridge@dmhstallard.com.

 

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