It is common for commercial leases, particularly when a lease is for a longer term, to include a break clause. This is also known as an option to determine and is usually agreed between the landlord and tenant prior to entering into the lease. So, what exactly is a break clause? And how can you make sure that you benefit from yours?
What is a break clause?
A lease usually runs for a specified term, which both parties agree before entering into the lease. Depending on the length of the term, one or both parties may wish to insert an option to terminate the lease early. To do this, the parties add a clause into the lease, giving the parties a mechanism to terminate (or ‘break’) the lease early.
Break clauses can be operated by just one of the parties. Alternatively, you may have a mutual break clause, which gives the landlord and the tenant power to exercise it.
What does this mean for landlords and tenants?
For tenants, a break clause can be very attractive when negotiating a commercial lease. This is because the option to end the lease early gives the tenant more flexibility. Lease obligations can be demanding; should the business not be as successful as hoped, there is the opportunity to terminate the lease early and avoid paying rent on a property with a non-existent business. Likewise, if business goes better than anticipated, terminating the lease early means an option to move to bigger premises.
For a landlord, a break clause may be considered, for example, if he was considering selling the property within the lease period.
How do I exercise the break clause?
The terms of the lease will detail how the party should exercise the break clause. Normally, the clause includes a specific date, known as the break date. The parties will agree the break date when negotiating the lease. The timing of the break date will depend on the length of the term of the lease. However, they are commonly seen in the third or fifth year of the term.
To exercise a break clause, the party wishing to exercise it should serve a notice on the other party. The notice must be served correctly and in accordance with the terms of the lease. This will normally be at least six months prior to the break date. Getting the timing right is vital. If you do not serve notice in time, the notice may not be valid, leaving you unable to break the lease.
On top of the break date, the lease may give additional conditions. Common examples are: ensuring that all rent is paid up to the next rent payment date; and complying with other covenants in the lease.
What happens if the lease is assigned?
If the lease is assigned, the terms of the lease will dictate whether the break clause is also assigned. Where the break clause specifically states that it is personal to the original landlord or tenant, it cannot be exercised by a future landlord or tenant once the lease after assignment. If the break clause is silent on the matter, it is deemed to include all future assignees. This means that if you assign the lease to a new tenant or landlord, the break clause can also be exercised by them. This may be attractive to a prospective purchaser, providing the break date has not passed.
If you would like to terminate your lease early or are negotiating a new lease and would like to consider a break clause, contact our specialist commercial property team. Call us on 0800 988 7756 to discuss.