One of the key points to consider when running a business is where your business will be based and how long you will remain in those premises. Once you have found a premises to conduct your business, it will usually be necessary to enter into a commercial lease for a fixed term. However, what if you decide after a shorter period the premises from which you are conducting your business is not fulfilling your needs? The answer can sometimes be found in the form of a break clause – if you have negotiated a break clause into your lease at the beginning.
A break clause allows a party, or both parties, to a lease to terminate the lease before the end of its contractual term either at an agreed date (‘fixed break date’) or any date after a certain period (‘rolling break’).
The importance of having a break clause can be seen recently with many businesses wanting to end their leases earlier than the agreed lease term due to having the financial pressures of Covid-19 or, for many businesses, reverting to working from home and wanting to downsize.
How a break clause can be exercised and points to watch out for;
If your lease does not contain a break clause, there is no right for you to break the lease and you can only assign the lease to a third party (usually only with the consent of the landlord) or attempt to negotiate the surrender/termination of the lease with the landlord.
The lease will set out the procedures in which the relevant party can serve formal notice (usually referred to as a ‘break notice’) to exercise the break clause. It is usual (check lease carefully) for the following requirements to be followed to effectively break the lease:
- The break notice must be served no less than 6 months before the break date. If you are one day late in serving the notice, it will not be valid and you will lose your right to break on that break date.
- All rent and service charges paid up to date at the time of serving the break notice and on the break date
- The premises are fully vacated on the break date. Therefore, a tenant should ensure that they give plenty of time to remove any fixtures and fittings when serving the break notice. A tenant may also need to ensure the property is free of any existing underleases, third party rights and/or charges.
- There are no continuing breaches of the lease.
Break requirements vary lease by lease so you must check the terms of your lease carefully.
The procedure for issuing the break notice can be just as fundamental as the break clause itself and the lease clause will state how the notice will be served, the form it will take, the notice period required and to whom it should be served to. It is important to note that once the break notice has been served to the other party it cannot be withdrawn.
The drafting of the break clause should be precise and detailed in order to avoid any misinterpretation or confusion. Not only does this apply to the break clause, but the break notice as well. There have been examples (Siemens Hearing Instruments Ltd v Friends Life Ltd ) of where a poorly drafted break notice has been deemed inadequate to what was required under the break clause and therefore invalid.
The Commercial Property team at Lewis Denley are highly experienced in dealing with all aspects of commercial leases on behalf of both landlords and tenants.
We provide a depth of experience along with a refreshing, innovative approach to each individual commercial matter. If you are looking for assistance with entering into, or breaking a commercial lease, please get in touch with a member of our team here.