Break clauses form a relatively small part of modern commercial leases, which today can stretch to over 60 pages of obligations, rights and definitions. However, despite being easy to overlook after thousands of words of legal jargon, these clauses have an importance which cannot be overstated.
A break clause gives a landlord, tenant or both the right to end the lease on a certain fixed date or a certain event occurs by ‘serving’ a ‘notice’ if certain conditions are met. The ‘notice’ itself is a document addressed to the other party to the lease, stating that you are ‘exercising’ your right to break the lease in accordance with the relevant clause under it. ‘Serving’ means correctly delivering this notice to the other party. For instance, a tenant could terminate a 15 year lease at the end of the fifth or tenth years by serving a notice. Alternatively, it could serve a break notice if it is prevented from trading due to necessary statutory licenses being withdrawn, such as for serving alcohol in a pub, to avoid the tenant being left with a useless asset. Break clauses are often present in longer leases, giving either party the flexibility to end the lease if their circumstances change.
When you are first taking a commercial lease, you may not find it worthwhile to think about how you could possibly exit it years ahead in the future. But planning ahead and being prepared for these dates as they move closer can help you avoid much wasted time, money and energy. Failing to ‘exercise’ a break notice correctly when the lease break date is coming up quickly can mean you remain locked into what might be an unprofitable arrangement.
Commercial break clauses can be problematic for three reasons. Firstly, any pre-conditions specified in the break clause must be strictly complied with for the notice to be effective. A minor departure from the exact words of the sub-clauses can be enough to invalidate the notice. What makes this more difficult is that a failure may not obvious until the landlord informs you on or near the break date itself that your notice is ineffective, because of what appears to be a trivial error or an issue you would not have considered. For instance, one common pre-condition is that a tenant must give vacant possession on or before the break date. In the case of Riverside Park Ltd v NHS Property Services , the tenant was deprived of breaking the lease because it had not removed standard demountable partitions it had installed during the term. It was held that these were the tenants ‘chattels’ (property) which interfered with the landlord’s possession.
Another contentious condition is that a tenant must have complied with the tenant covenants (legal promises) under the lease. The courts can take a dim view if the tenant has breached these, even if the breach appears to be relatively inconsequential. Failing to pay negligible amounts of default interest on past rent arrears has been enough to deprive a tenant of a right to break the lease (from Avocet Industrial Estates LLP v Merol v Another ). A common issue is when the break date falls between rent payment days. If the lease requires tenant’s covenants to be performed and the rent is payable in advance, you as tenant must pay the full rent for the period (e.g. quarterly) in advance. This is the case even if you will not be occupying the premises for the whole period.
The second issue of that the notice itself must state the correct terms, including the right break date, to be effective. These requirements are also viewed relatively strictly by the courts. For instance, many clauses require a notice to be served within three, six or nine months before the break date. If not served in time, the notice will be ineffective. There is some leeway for mistakes; for example, a notice with an incorrect date may be held valid if the mistake would have be obvious to a reasonable recipient so he wouldn’t have been misled. However, trying to prove that a mistake does not disqualify your notice in a court of law can involve much time and expense.
Thirdly, a break notice must be served correctly on the other party. Leases often provide that service cannot be by email and must be by post, usually first class post or recorded delivery. The notice must then be sent to the correct address or addresses. Again, the courts enforce these terms of the break clause closely. A landlord serving a notice on the tenant’s home address rather than its registered office address was enough to invalidate the notice in Claire’s Accessories v Kensington High Street .
In closing, although the act of breaking a lease may appear relatively simple, the act of correctly exercising a break clause can be a minefield with serious repercussions if the clause is not correctly followed. We would strongly recommend that you take legal advice when it comes to exercising your break rights, to ensure that you get it right first time.
Commercial Real Estate Executive