Understanding break clauses in lease agreements is vital. After all, the cost of a mismanaged break clause can potentially run into tens of thousands of pounds.
In today’s evolving work landscape, businesses are reevaluating their office space needs and considering the possibility of terminating existing business leases for underutilised office space. Some leases offer a solution to this dilemma in the form of break clauses. But what exactly is a break clause?
This post will explore what a break clause in a commercial lease is, the common requirements, and whether or not it can be rejected or withdrawn.
What Is a Break Clause in a Lease?
Break clauses are provisions written into a commercial lease that allow a landlord or tenant early termination of a tenancy agreement. This is usually at one or more fixed points in time (for example, eighteen months and three years through a five-year lease). A break clause will provide for a party to terminate their lease early by serving a break notice on the other party.
Whilst serving a notice to break a lease is common practice, break clauses require careful consideration at the negotiation stage of the lease and at the point of exercising the clause by serving a break notice. This is because there are often strict requirements in the lease that must be followed to the absolute letter in order to serve a valid break notice. Failure to do so will mean that the notice to break the lease is invalid and, dependent on timescales and the provisions of the break clause, the lease may then continue until the end of the term or until the next break date.
When considering rent and business rates, the cost of getting a break notice wrong can run into tens of thousands of pounds. Tenants may be keen to achieve an early termination of their tenancy agreement by exercising a break clause, whilst landlords will be scrutinising the lease to see whether there is valid service, particularly if it is likely to be difficult to find a replacement tenant.
Break Clauses in Lease Agreements: Common Requirements
Break clauses in commercial leases must adhere to certain rules – following these rules is imperative to the success and validity of the notice. These requirements include:
- The time for serving a break notice
Leases typically require notification at least six months before a break clause in a lease agreement is to come into effect. If the notice is served late, it will be invalid. Considering timing further, tenants should be cautious about when to exercise the break clause, ensuring they have considered factors like market conditions, dilapidation costs, and the effect it will have on their business.
It is imperative that tenants speak with a solicitor to understand the timescales for service of break notices, as each lease can be different, and the six-month deadline is by no means the rule.
- The method of serving a break notice
If the lease says the notice must be sent by recorded delivery or registered post, it will be invalid if it is sent by first class post, even if the landlord received it in time. Leases usually provide for alternative methods of service, including hand delivery.
Different service methods are deemed to take different lengths of time before they are considered received by the landlord. The break clause is likely to require that the break notice be “served” by a specific deadline, not that it be merely “sent” by this deadline. So, don’t post a break notice on the last day permitted by the lease if the lease provides that service by post is deemed to take two days.
- Serving the break notice in the correct place
The lease may specify where the notice should be served. This might have to be at the landlord’s registered office rather than their trading address. Be careful if the landlord’s head office is in a foreign jurisdiction, including places like Scotland or the Isle of Man, as the deemed service dates might differ.
In addition, it is not uncommon for a company’s registered office to change between entering into the lease and the service of a break notice. You, therefore, need to be clear as to the address to which the break notice should actually be served. Given the likelihood of the recipient of a notice seeking to argue its invalidity, it is vitally important to get this right. Therefore, relying on your solicitors to guide you on this point is highly recommended.
- Signing the break clause in a lease by the correct person
Who has the authority to sign the break clause in a commercial lease, particularly if the landlord or tenant is a partnership or company? Do agents have the authority to sign? What if the property has been transferred to a new owner during the lease term?
These issues need careful consideration when drafting a valid notice to break the lease. It may be prudent to check the current ownership at the Land Registry by obtaining an official copy of the register. If in doubt, it might be appropriate to serve multiple notices (or at least to send copies of the notice you consider to have been validly served in copy to other parties at other addresses).
- Returning the property in good condition
For tenants, any failure to undertake works required under the lease could render the break clause in the lease invalid.
- Complying with the terms of the lease
Any conditions attached to the right to break must be strictly performed in order for the break clause in the lease agreement to be valid. This might include requirements to decorate the property in the last three months of occupation, or ensuring that all rent is up to date.
A common error is paying rent up to the intended break date. However, no reduction must be made to the normal rent payments if, for example, a full quarter’s rent is due. Otherwise, this would be a breach, causing the break clause in the lease to fail. Any overpayment on a quarterly rent payment due to a successful break can only be reclaimed if the lease provides for this. Still, getting out of continuing obligations under the lease is a small price to pay.
A landlord is not obligated to point out break clause errors in commercial leases. If you are a landlord who receives what you consider to be an invalid break notice, the best course of action if you want the lease to remain in place is to stay quiet. Do not say anything to the tenant or do anything that might be taken as accepting service of an otherwise defective break clause.
Can You Withdraw a Break Clause in a Lease?
Once a break notice has been served, it cannot be unilaterally withdrawn, so be sure you want an early termination of the tenancy agreement before serving the break lease. Serving a notice as part of a rent negotiation is risky, and we advise you to contact our business legal services team before doing so.
As always, evidence is key, so make sure copies of everything are kept in case a dispute arises, and facts have to be proven in court.
The requirements to ensure a break notice is valid are strict, so break clauses in commercial leases remain a breeding ground for litigation. Assuming a party can comply with the break clause conditions, they would be well advised to seek legal advice before drafting and serving the notice exercising their option to break.
Do All Tenancy Agreements Have a Break Clause?
While common in commercial leases, break clauses are not essential, and rely on the terms agreed between the parties at the outset, within the lease. Both landlords and tenants can benefit from including break clauses, particularly in long-term leases, as it gives both sides an out if their situations should change.
How Early in the Tenancy Can You Have a Break Clause?
The timing of the break clause in a tenancy can vary. Usually, break clauses are activated at a pre-specified point in the tenancy agreement. In some cases, a commercial lease will include a rolling break, which entitles the relevant party to serve a break notice at any time during the term, or during a specific time period within the term of the lease.
Can You Break a Lease Without a Break Clause?
Without a break clause in a lease, tenants are normally bound to the terms of the lease. However, it is possible to negotiate an early termination with the landlord. If the landlord agrees to sign a deed of surrender, the tenant can break the lease but might have to cover the landlord’s costs (and potentially pay a surrender fee) in connection with ending the tenancy earlier than expected.
Alternatively, if the landlord is not being cooperative in negotiating an early termination, another option does exist. A tenant may be able to break a lease without a break clause if they can identify a legal ground to terminate the lease, such as the landlord breaching the contract.
Need Advice on Break Clauses in Lease Agreements?
Obtaining legal advice for break clauses in commercial leases can be critical, especially because these clauses can be complex and contain specific conditions that must be met precisely. Fortunately, our team of solicitors can help you interpret the legal jargon, ensure you comply with all the necessary requirements, and help you avoid costly disputes.
We can also help you negotiate more favourable terms, protect your rights, and provide clarity on the implications of exercising the break clause, ensuring you have a full understanding of the financial and legal consequences involved in this process.
If you are looking for comprehensive legal advice regarding drafting a break clause in a lease, and/or serving a break notice, please get in touch with our specialist team, who are ready to help.
We can also assist in other areas of commercial property law, whether you need guidance in property development, finance, or agricultural conveyancing. Take a look at the rest of our blog for more valuable insights.