Break Clauses in Leases – What do they do?
In leases, break clauses serve as crucial provisions that can provide flexibility for both landlords and tenants.
A break clause can be in favour of the landlord, the tenant or both landlord and tenant and allow the benefitting party to terminate the lease before the expiration of the fixed term, subject to certain conditions and notice requirements being met.
Break clauses are regulated by specific laws and have implications that both parties should carefully consider. This article aims to shed light on the key aspects of break clauses in leases, outlining their effects, considerations for landlords and tenants, and the importance of seeking legal advice when exercising them. Break clauses can be included in both residential and commercial leases, but this article will primarily focus on commercial leases.
What is a break clause?
A break clause is a contractual provision that grants one or both parties the right to terminate a lease prematurely. It acts as an escape route, allowing parties to exit a lease early, providing flexibility in an ever-changing business environment. It impacts all parties, so it is important that both landlords and tenants have an understanding of them. The points for each party to consider differ slightly in detail and are outlined below.
Break clauses are typically subject to specific conditions, especially for the tenant, such as the provision of a specific period of notice and means of serving such notice, payment of outstanding rent, compliance with repair obligations, or the giving of vacant possession of the property.
Points for Landlords to Consider
For landlords, it is vital to carefully draft break clauses to ensure they protect their interests. Ambiguous or poorly worded clauses can lead to disputes and uncertainty. Seeking legal advice when drafting a break clause can help landlords avoid potential pitfalls.
Break clauses usually require the serving of a notice by the party wishing to terminate the lease. The notice period can vary, but it is crucial for landlords to clearly specify the required length of notice in the lease.
Points for Tenants to Consider
Tenants must thoroughly review the conditions associated with the break clause. These conditions may include obligations such as reinstatement of alterations, payment of outstanding sums, or compliance with repairing obligations. Failure to fulfil these conditions can lead to the break clause being invalidated which may result in a tenant missing the break date and being unable to terminate the lease early.
Timing and Flexibility
Break clauses provide tenants with the opportunity to reassess their business needs and exit a lease if necessary. However, tenants should be cautious about the timing of exercising the break clause. It is essential to consider market conditions, relocation logistics, and the impact on the business before deciding to terminate the lease whilst similarly ensuring that they comply with the requisite notice period.
As with landlords, tenants must carefully adhere to the notice requirements specified in the lease. Failure to serve the notice within the specified timeframe could result in the continuation of the lease and the tenant will have to fulfil their obligations for the remaining lease term.
Seeking Legal Advice
Exercising a break clause can have significant implications for both landlords and tenants. Due to the complexity and potential risks involved, it is strongly recommended that the parties seek professional legal advice before taking any action. An experienced solicitor with expertise in property law can review the lease, clarify obligations, and guide clients through the process, ensuring compliance with legal requirements and safeguarding their interests.
Sophie Williamson, a specialist in Commercial Property law, said:
“Although more modern leases are generally moving in the right direction by providing break clauses which are easier to comply with, we are still seeing leases which have been recently granted with break conditions which are difficult (or sometimes impossible) to satisfy. In addition, it is not uncommon for a tenant to be convinced they have satisfied their break condition only to find out on their break date that they have fallen into one of the common traps, for example, by apportioning their rent so that they only pay rent due up to the break date or by not leaving enough time for service of the notice or not serving the notice correctly.”