Break clauses are becoming a regular feature in commercial leases particularly in the current market. Break clauses can be included to allow either the landlord or, more commonly, the tenant to terminate the lease early. The break dates may either be fixed or may be exercisable at any time during the term as a rolling break. It is important to ensure that the break date is clearly ascertainable if the actual break date is not specified in the lease. Time shall be of the essence in respect of any time limits within the break clause and it is important to ensure that sufficient notice is served.
Break clauses can be personal to the original tenant who entered into the lease or can operate for the benefit of any entity in which the lease is vested during the term. It is also important to refer to the notice provisions contained within the lease to ensure that those requirements are met. Notice must be served upon the correct party at the correct address.
It is preferable from a tenant’s point of view for a break option to simply require the service of prior written notice to terminate the lease. However it is common for a landlord to include a range of other conditions which, if not strictly performed, may prevent the break clause from operating and the lease shall continue to run. A tenant should seek to resist such conditions during negotiation of the lease if at all possible.
The Code for Leasing Business Premises in England and Wales 2007 recommends that the only preconditions to tenants exercising any break clauses should be that they are up to date with the main rent, give up occupation and leave behind no continuing subleases. The Code, however, is not binding upon landlords and therefore the actual conditions can vary from lease to lease.
Conditions can require the tenant to pay all sums due under the lease up to and including the break date (rather than the annual rent only). This can lead to possible issues where an installment of rent during the term may have been paid a few days late and therefore interest having accrued without the tenant being aware. The landlord may not be under an obligation to demand that interest and if that interest payment (which may only amount to a few pounds) has not been paid by the break date it can mean that this condition has not been complied with and the break notice may fail.
It is important to note that rent is not subject to apportionment. Therefore if the break date falls between two rent payment dates then upon the rent payment date immediately prior to the break date a full installment of rent is payable. If that installment of rent is apportioned up to and including the break date then the likely effect is that the condition has not been complied with and the break notice may fail.
A condition requiring the tenant to have performed all of its covenants contained in the lease up to the break date may prevent the operation of the break clause due to a relatively minor breach of covenant.
A condition may require the tenant to give vacant possession of the property on the break date. This is a more onerous obligation than simply giving up occupation of the property as it requires the property to be empty of people and chattels so that the landlord is able to assume and enjoy immediate and exclusive possession, occupation and control of the property.
There has been a lot of recent case law in respect of conditional break options. They serve as a stark reminder to tenants to ensure that any conditions attached to a break option are strictly observed and performed as Courts will strictly construe and apply the conditions. It is recommended that appropriate and timely advice is obtained if a tenant is considering exercising an option to break contained within their lease.
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