Breaking Good – Guidance for the successful exercise of break clauses in commercial leases
27 / 03 / 2018
In times of increased political and economic uncertainty, the prospect of a long leasehold interest in a commercial building is not as attractive as it perhaps once was, neither for landlords or tenants. To incentivise parties to commit, as well as provide a form of security, the implementation of break clauses within leases has become far more common in recent years.
This increase is shown in recently published research from the MSCI Lease Events Review 2017, which found:
As at June 2017, 40.3% of leases included a break clause, a rise from 28.2% in 2008. This increase was particularly marked in leases between 6 and 10 years in length, where the proportion with a break clause has risen from 40.3% in 2008 to 60.9 in 2017. Unsurprisingly, there has been an even greater increase for leases 21 years and longer, rising from 15.5% to 32.5%.
With increasing numbers of leases including break clauses, additional scrutiny is placed on whether a break has been correctly exercised under the terms of the lease. If a break has not been correctly exercised it can have serious financial consequences for the party seeking to terminate the lease, as they will continue to be confined within the lease, perhaps for many more years, and they may even have already agreed to take a lease of different premises with the hope of a seamless transition. Conversely, this may be a boon to the party challenging the break, as they may not be faced with the costs of marketing the premises and could avoid a potentially costly fallow period between tenants. Of course, the unsuccessful exercise of a break clause may cause the relationship between landlord and tenant to break down, particularly where the rent is high and a tenant is seeking to minimise its outgoings by moving location.
I have set out three important tips below to aid in the successful exercise of a lease break.
- Check the appropriate clauses of the lease thoroughly
In most modern leases, the break clause is usually simply labelled as just that, and there may be separate break clauses for a landlord break and a tenant break. In older leases, a break clause may not be so clearly identifiable, possibly being marked under ‘Determination’ or ‘Lease Termination’. The break conditions typically specify:
- payments being made under the lease;
- performance of covenants under the lease; and
- vacant possession of the premises.
It is important to check the conditions thoroughly as they may be variations on the three points above; some leases refer to just payment of rent, performance of material covenants or free from occupation which all have different legal interpretations.
- Be cautious when making payments under the lease
Ensure all arrears have been paid (this can include service charges, insurance payments and any additional costs depending upon the wording of the lease) not just at the date of the service of the notice but most importantly by the actual break date.
Check carefully when payments are due and when the break date falls. If a rent payment date falls just before the break date, a tenant must ensure that unless they have agreed differently with the landlord, the full amount of all payments are made for the entire period (i.e. not just apportioned up until the break date), otherwise the break will be ineffective. In well drafted leases, break dates will fall on the last day of a rent period or may contain sub-clauses for express reimbursement of the payment of rent (and other sums) which cover the period beyond the break date.
- Comply with notice provisions under the lease
A break cannot be exercised without the service of a valid break notice so it is important to check the specific provision within the lease for the service of notices. If the notice provisions within the lease are unclear, it is best to serve the notice on the registered office address of the party as well as any additional address where the party can be considered to receive notices. If in doubt, serve it in person to the office of the landlord and ensure a signature is received.
For specific advice in respect of the exercise of break clauses please don’t hesitate to contact me.