Breaking up isn't easy

With many businesses/ occupiers currently reviewing their property requirements it’s important to fully understand any break clause conditions that may exist well in advance of serving notice on the landlord.

Many commercial leases contain break clauses in order to provide their business with greater flexibility during the lease term but the conditions attached to them are often complex.

If conditions of a break clause are not complied with then the lease will continue until the next available opportunity to end the lease. Courts take a very strict view on this.

It’s therefore imperative that professional advice is taken well before the decision is made to exercise a break clause. It will be dependent on the size of the premises but we advise taking advice approximately 18 months/ 2 years before a break notice is due to be served. This early preparation will assist in deciding whether to exercise the break clause or remain until lease expiry and ensure there is enough time for successful implementation.

Below are some of the common conditions found within break clauses and pitfalls to be aware of:

Written Notice – One of the most common conditions within a break clause is that written notice is served on the landlord within a specified period. This sounds very straightforward but can be fraught with difficulties. We advise your solicitors deal with this aspect and ensure it is served within the timescales determined by the lease, served at the landlords registered address and in the correct manner.

Payment of Rents – This may not mean just paying rents to the break date. Depending on the lease terms the rent maybe payable to the next quarter or beyond. The words rents may include service charge, insurance rent or other costs in addition to the actual rent. Interest may have accumulated on any previous late payments which would also be payable. It’s imperative that there is close communication between the estates team and accounts to ensure all payment is made before the date specified in the lease as accounts teams will often not know the repercussions of a late payment.

Overpayment of rents is an option but depending on the wording of the lease it may not always be recoverable.

Break Penalty – A financial payment maybe required to the landlord in order to exercise the break clause. Always worth checking how much and when payment is required ie. Specific date, before break notice is served, before break date.

Vacant Possession – The main difficulty in providing a landlord with vacant possession is that there is no concrete definition of what constitutes vacant possession. Merely not being in occupation and removing possessions on the break date or not having any sub-tenants insitu may not comply with this clause.

If alterations have been made then these may require reinstatement to ensure the landlord can have full enjoyment of the premises.

This is an area which needs careful consideration well before the break notice has been served. If works have to be undertaken then this needs to be factored into the vacation date which could be well before the break date, depending on the extent of the works required. It’s essential that all chattels are removed, however, due to the difficulties of categorising a chattel (purpose & degree of annexation) or tenants fixture, its often advisable to remove both to ensure compliance. See Riverside v NHS Property Services.

Material Compliance – This requires the tenant to materially comply with the lease covenants including covenants in relation to dilapidations such as repair, decoration, reinstatement & yield up and statutory compliance (it will include other financial obligations as well).

As with vacant possession, early consideration is required and a strategy needs to be implemented to ensure compliance. Vacation from the premises will need to be factored in prior to the break date (this will vary depending on the extent of works required). It maybe possible to agree an early financial settlement with the Landlord, however, a Landlord will often not engage with a Tenant in this regard so undertaking the works required maybe the only option. See Fitzroy House Epworth Street v Financial Times Limited which is the leading case in this area.

Absolute Compliance – These are relatively rare, but some do still exist. They are almost impossible to comply with and early consideration on whether to even exercise the break clause should be taken into account. If considered early it maybe possible to regear the lease but the sooner a tenant becomes aware of such a condition in a break clause the better.

In summary, if a break clause is being considered then solicitors and surveyors should be involved before the break notice is served to ensure that a sensible strategy is implemented which will vastly increase the likelihood the break clause will be successful.