The inclusion of a ‘break clause’ in a lease of a commercial property is an essential thing for both a landlord and a prospective tenant to consider before formally entering into the lease or an agreement for lease.
What is a break clause in a lease?
A break clause in a commercial lease provides both parties with a mechanism to terminate the agreement if certain criteria are met. It is a fairly common option to provide flexibility to both parties should any issues arise or a change in circumstances occur.
Example:
Company ‘A’ enters into a ten-year commercial lease with a landlord for a large shop on 1 November 2024. 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’ prior notice.
Early in 2027, 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 February 2027. The agreement then formally ends on 1st November 2027.
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.
Sometimes it is only the landlord or only the tenant who has the right to break.
Sometimes there may be a cost to the party for exercising the break (e.g. the tenant can break but must pay the landlord a premium equivalent to a certain number months’ rent).
It all depends on what the parties can agree before entering into the lease commitment.
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 might hit some hard times after a certain number of years and wants to option 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 some way. This may be especially important if the property has development potential. A landlord cannot end a lease because the landlord now has planning permission, unless a ‘break clause’ was included at the outset.
Whilst a break clause offers flexibility, it can also give rise to issues – either party might see a ‘break’ right as a chance for them to renegotiate the terms of the lease, e.g. the rent.
Important things to consider when including a break clause in a commercial lease
A. 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, unintendedly, 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 later.
B. A landlord can impose certain conditions on a tenant’s break. The Code for Leasing Business Premises (see here) advises that the only acceptable conditions are:
- 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.
- That the tenant gives up occupation and leaves behind no subleases
A landlord may 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.
C. A tenant should ensure there is provision that any rent and other payments made in respect of the period after the ‘break date’ be refunded to the tenant if the ‘break right’ is exercised. The tenant is usually obliged to pay the rent monthly or quarterly in advance. If part of the payment relates to the period after the beak date, the tenant will want the ability to obtain repayment of the part in respect of the period after the ‘break’.
How can we help?
Martin Jinks is a Consultant Solicitor in our expert Commercial Property team and also a Notary Public.
For more information on the above subject, please contact Martin or another member of the team in Derby, Leicester, or Nottingham via our online enquiry form or call 0800 024 1976.
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