Following her previous article, Specialist commercial property solicitor at Holmes & Hills, Laura Gale, discusses break clauses and the benefits they may bring as well as the additional factors that need considering.
A break clause within a commercial lease provides an option for a landlord or tenant (or both) to terminate the lease early, e.g. before expiry of the contractual term. The right of a party to break the lease will be detailed within the break clause and may be exercisable on a given date, or on several specified dates during the term. Alternatively, the right to break may exist for a specified period.
Break clauses provide tenants and/or landlords with an ability to reassess their commercial property strategy and requirements during the term of the commercial lease by bringing the lease to a premature end.
Break clauses allow tenants to reconsider their commercial property requirements, relinquishing and moving from the premises in order to increase or decrease their commercial space, or find alternative premises which offer something different as the commercial requirements of the business change.
For landlords, a break clause which grants the right to break the lease allows them to consider their commercial property investment portfolio, providing the flexibility to end the tenancy and grant a lease to a new tenant, sell the freehold reversion with vacant possession, or develop the property or land in the event that their strategy changes.
Break clauses can be of material benefit to landlords and tenants, but exercising a break clause is fraught with risk. A minor administrative or procedural error in exercising the break clause can lead to the attempted service of the break notice being argued to be invalid by the other party, rendering the party attempting to exercise the break notice fully liable under the lease until the end of the lease term, or at least until the next opportunity to break, if one exists or until a lawful assignment takes place
An option to break should be exercised strictly in accordance with the terms of the lease.
Generally, a break notice will only be valid if:
As above, if a break notice is served incorrectly, the serving party will remain “on the hook” and subject to the terms of the lease (including payment of all rents and service charges) until the next break date/expiry of the contractual term of the lease/lawful assignment. It is for this reason that it is always advisable to seek legal advice well in advance of a break date, in respect of service of a break notice. It is also worth mentioning that following completion of a lease including break options, the parties should take care to diarise the break date(s). It is the parties’ responsibility to ensure they are aware at all times of upcoming rights to break, to ensure they do not miss the break date(s) in question.
Exercising a break option will not entitle a tenant to any partial refund of stamp duty which was paid on the acquisition of the lease, and this should be considered at the outset during negotiation of the lease. However, dependent on the wording of the lease, the tenant may be entitled to refund of rents paid in advance for a period which relates to after the break date.
If you are a landlord or tenant considering exercising a break clause, it is important to obtain early advice from a specialist commercial property solicitor. Owing to the potential financial implications, as well as the fact that time constraints within break clauses often stipulate service of a break notice many months in advance of a break date, it is recommended that you seek advice well in advance of the final date a valid break notice can be served on the other party, to facilitate valid service.