Break Clauses In Commercial Agreements

Vacant Possession

The inclusion of a break clause in a lease of a commercial property is an important and essential thing to consider for both a landlord and business tenant before formally entering into the agreement.

What is a break clause in a lease?

A break clause in a commercial lease (also known as an option to determine) is fairly common. It allows both parties flexibility if any issues or changes in circumstances occur, and provides the parties with a mechanism to terminate the agreement early if certain criteria are met.

Example:

Company ‘A’ enters into a ten-year commercial lease with a landlord for a large shop in 2010. The lease includes an agreed break clause whereby either party can terminate the tenancy at any point after the first three years but they must give 6 months’ notice before the lease actually ends.

In 2015, Company ‘A’ hits some financial problems and needs to downscale its premises in order to stay in business. They inform the landlord of their intent to exercise the break clause to end the commercial lease and give the required six-month notice period on 1st May 2015. The agreement then formally ends on 1st November 2015.

Alternatively, a break clause could be that there is an agreed date (possibly the mid-way point of the lease term) whereby either party can end the lease. A notice period would again apply in these circumstances.

Whether you are a landlord or a tenant, it is always worth considering including a break clause in a commercial lease, but the need for one will depend on your circumstances. Similar to the example above, if you are a relatively small start-up business that hits some hard times after a certain number of years and wants to downscale or close your business operations, then having a break clause option in place would be most beneficial.

If you are a commercial landlord, then a break clause option can allow you to remove troublesome tenants, expand your own business or sell the premises, if your personal circumstances change in any way.

Whilst a break clause offers flexibility, it can also provide issues, such as either party might see an agreed break clause date or point in time as a chance for them to renegotiate the terms of the agreement, e.g. the rent.

Important things to consider when including a break clause in a commercial lease 

When the lease is drafted, the exact wording relating to the break clause needs to be clear and transparent and not open to interpretation (this practice is best applied across the entirety of the lease). This is most important if you are the party that wants to exercise the break clause option.

Potential disputes that might occur if the break clause is worded poorly can include the exact date that the tenancy ends, and subsequently the obligation to pay all of the rent (plus other payments) up to the point in time of the lease end date.

Break clauses in commercial leases can often be left open to interpretation, so it is vital that you always seek legal assistance before signing an agreement to ensure you are best protected from any problems down the line.

A landlord can impose certain conditions on a tenant’s break. The Code for Leasing Business Premises advises that the only acceptable conditions are:

  1. That the principle rent is paid up to date and cleared funds before the break date

This condition should only relate to the principle rent and no other payments that the landlord would be entitled to under the terms of the lease, such as a service charge.

If the other payments under the lease are not paid, then the landlord can take other legal action against the tenant. The tenant should not lose its right to break the lease on this basis.

  1. That the tenant gives up occupation and leaves behind no subleases

A landlord will most likely attempt to amend this to state that the tenant has provided vacant possession. The legal definition of vacant possession carries with it a higher threshold. There is a danger that the tenant leaves the property and a third party moves in, e.g. a squatter, and the tenant loses its break as it has not provided vacant possession.

No other conditions should be attached to a tenant’s break, as it could mean that the break is ineffective.

How can Nelsons help?

At Nelsons, our team of expert commercial property lawyers work with landlords and business tenants to advise on and negotiate the right terms for them. In addition to break clauses, our team can advise on the full range of commercial lease considerations, including:

  • Landlord consent
  • Rent and rent reviews
  • Service charges
  • Assignments and sub-letting
  • Forfeiture
  • Lease renewals
  • Recovery of possession
  • Personal guarantees
  • Insurance
  • Responsibility for repairs

If you are involved in a commercial property lease and would like some advice, please get in touch with a member of the team in DerbyLeicester, or Nottingham on 0800 024 1976 or via our online form.

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