What is a break clause?
A break clause is a provision in a lease that allows tenants and landlords the right to terminate their lease before the expiry of a fixed term.
When is a break clause used?
A break clause is usually exercised on a fixed date during the lease term. Rolling break clauses are a type of break clause that is exercisable at any time during the term.
Why would a break clause be needed?
Break clauses are generally viewed as disadvantageous to landlords and beneficial to tenants. However, in today’s financial climate, landlords are more likely than ever to agree to a break clause provision in a lease as this can attract and secure tenants.
Landlords and tenants will of course have conflicting interests in a lease – so what are the implications for landlords and tenants in agreeing break provisions?
Implications for the landlord
Landlords will obviously want to minimise the risk of the property becoming empty, any loss in income and any danger that the property will be returned in a worse condition than at the beginning of the lease.
To minimise this risk, a landlord should seek to ensure that there are pre-conditions to the exercise of a break clause. These usually include the following:
- An obligation on the tenant to have paid the rents due to avoid rent arrears
- To ensure compliance with the tenant’s covenants in the lease so that the premises are returned in a satisfactory state
- The conditions must be fulfilled in order for the break clause to be exercised, unless otherwise agreed by the landlord
Implications for the tenant
Break clause provisions will be of benefit to a tenant for many reasons. For example, a tenant is likely to want the security of long-term lease with the flexibility to deal with an uncertain future. A tenant will usually seek to minimise any pre-conditions that the landlord imposes for the break clause to be exercised.
The Code for Leasing Business Premises in England and Wales 2007 seeks to address some of the problems tenants face. The Code recommends that pre-conditions that a tenant must comply with should be limited to provide that the principal rent that has been demanded has been paid, that there are no subsisting sub-tenancies and that the tenant has given up occupation. Whilst the Code can be used by tenants in break clause negotiations, compliance with it is not mandatory and, overall, it will usually depend on the bargaining power of the landlord and tenant as to what is ultimately agreed.
Break clause provisions can unfortunately be the cause of disputes between landlords and tenants – whether this is in relation to the negotiation of the break clause terms themselves, in exercising the right to the clause or complying with the clause’s conditions.
Therefore, both landlords and tenants should always be extremely cautious in dealing with any aspects of a break clause provisions and should seek legal advice at the earliest opportunity to avoid lengthy disputes.
If you have any questions about break clauses or leases, or would like Ringrose Law to act on your behalf for your Commercial Property transaction, please contact a member of the Commercial Property team at Ringrose Law’s Newark office.