Commercial leases are often designed to last for several years, with five and ten year leases both being common. While this provides a degree of certainty for both landlord and tenant, it can also cause potential problems, for example if the landlord later needs to regain vacant possession of the property for redevelopment, or the tenant’s business fails or needs to relocate.
A break clause is a provision that can be included in a lease agreement allowing either party to end the lease early if certain conditions are met. It can be granted for the benefit of either the landlord or the tenant, or for both. It allows the benefitting parties a way out if they need to end the tenancy early.
For example, in the case of a five-year lease, either party may have the option to end the tenancy at any time after the first two years, as long as they give an agreed amount of notice. Alternatively, there may be the option to end the tenancy on a specific date, e.g. at the half way point of the tenancy, as long as the correct notice is given before that date.
Break clauses are typically exercisable on a particular date but can sometimes be rolling in nature, e.g. they may be exercisable at any time on giving 6 months notice.
While not all lease agreements will include a break clause, it can be worth considering depending on the circumstances.
Is it worth including a break clause in a lease agreement?
This will completely depend on the situation. If you are a prospective tenant starting a new business, it may be sensible to bear in mind that around 1 in 5 businesses fail in their first year and around half fail within their first 5 years. Having a break clause can therefore be a sensible precaution against being tied into a lease you may end up being unable to sustain.
As a landlord, there can be various reasons for including a break clause, such as protecting yourself against being stuck with difficult tenants or allowing you the freedom to exploit the property in different ways, for example, if there are plans to regenerate the area where your property is located.
One issue landlords need to consider is that some tenants will see the point at which they can exercise a break clause as an opportunity to renegotiate the terms of the lease.
Similarly, tenants need to be aware that landlords may see this as an opportunity to empty the property and find a higher paying tenant, especially if the property’s value has increased significantly – something that may be an issue in up and coming areas.
When is a break clause enforceable?
When trying to use a break clause, you will need to honour the exact wording of the clause. In some cases, this can present a challenge as it is not uncommon for break clauses (and lease agreements in general) to be poorly worded.
For example, if the lease says you have “the right to terminate the tenancy at the end of the first one-year period” this will likely mean you can only end the lease early if you do so exactly one year after the tenancy began.
However, if the clause read “the right to terminate the tenancy at any time after the end of the first one-year period” it would likely mean you could end the tenancy at any time after the first year, as long as the appropriate notice and other conditions are met.
Typically where a tenant exercises a break clause there will be a requirement to pay all rent (and other payments due) up to date at the time of the break. If the break date is in the middle of a rental period then this will mean paying the full amount due and then seeking a repayment of the overpayment after you have vacated.
There is often disagreement between landlords and tenants over the interpretation of break clauses, so it is vital to have an experienced commercial property solicitor read over the lease agreement and clarify exactly what is intended before signing the lease and certainly before attempting to exercise the break clause.
It is also critical that the correct amount of notice is given so it is vital that you seek advice at least a month before notice is due to be served. If this is not done correctly then the break will not be effective.
Need help ending a commercial lease early?
Bird & Co Solicitors is a long-established law firm offering commercial property services to landlords and tenants across England and Wales from our 3 offices in the East Midlands.
We have extensive experience with all of the issues involved in commercial tenancies, including writing and enforcing break clauses. We also offer a highly effective tenancy dispute resolution service, helping to ensure any conflicts over a break clause or other tenancy issues can be resolved quickly and in line with your business interests.
To find out more about our commercial property services, call us today on 01476 372 044 or use our contact page to find details of your nearest office.