What Break Clauses in Commercial Leases Mean for Businesses
What is a break clause?
A break clause is a term in a commercial lease that allows the landlord, the tenant, or both parties to end the lease before the fixed term expires without penalty. To use a break clause, the party relying on it must give notice to the other party confirming its intention to bring the lease to an end.
A break clause will usually set out:
- who can exercise the break clause;
- when the break can be exercised; and
- the conditions that either party must meet in order to exercise the break clause.
Landlord Flexibility
A break clause can be valuable to a landlord as it provides greater flexibility, particularly if redevelopment opportunities arise or market conditions change. A landlord with the benefit of a break clause does not have to wait until the lease has expired to carry out improvement or upgrade works, or to re-let the property at a higher rent in order to maximise income in a rising market.
If the lease is within the statutory protection afforded to business leases, a landlord break can only be exercised if certain criteria are met. Therefore, if the landlord has the benefit of a break clause, it is recommended that the lease be contracted out of the security of tenure provisions in the , to ensure it can be validly exercised.
Financial Risks to Landlords Arising from Tenant Break Clauses
Granting a break clause to a tenant can, however, create financial uncertainty for the landlord as, if the right is exercised, a landlord loses guaranteed income from rent payments, and the property may be vacant for some time whilst a new tenant is located. If the tenant exercises the break at a time when the market is weak, there is a risk that a landlord may have to accept lower rent from a prospective tenant in order to relet the property.
Because of this, it is often negotiated that a tenant break can only be exercised after a minimum period of the term of the lease has elapsed, and often the tenant is only given one opportunity to break. Once this date has passed, the landlord then has security of income from the property.
Tenant Flexibility
A break clause can also provide flexibility for the tenant as it allows for relocation freedom and adaptability to business changes. A tenant being able to exit the lease early can help their business respond to growth, downsizing or changing operational needs as they arise throughout the lease term instead of being tied into a long-term commitment.
Strict Requirements for Exercising a Break Clause
There are often strict conditions which the tenant must meet in order to exercise the break. A common example of this is the requirement to give vacant possession on or before the break date. This means that all fixtures and items belonging to the tenant must be removed from the property.
This may seem like a straightforward requirement, but case law shows that even leaving a trivial belonging behind accidentally can result in vacant possession not being given, meaning that the break notice may be deemed ineffective and the lease may continue to the end of the term or the next break date. Therefore, it is important that any tenant takes legal advice on the implications of any conditions attached to a right to break the lease.
The Importance of Balancing Flexibility and Risk
Break clauses therefore create greater flexibility for both the landlord and the tenant, but the balance of risk ultimately depends on how clearly and fairly the break clause has been drafted. It is critical that negotiations around a break clause are conducted carefully to ensure that the rights and obligations of both parties are clearly balanced and understood so that each party is aware of what they are agreeing to in order to reduce uncertainty and avoid future disputes.
There is more information about commercial leases and break clauses in this article:
How can Bridge McFarland help?
At Bridge McFarland, we have a dedicated team of commercial property experts who have proven experience in assisting both landlords and tenants and in reviewing break clauses in leases to ensure that they are fairly balanced and their interests are protected.
For , please call 0800 987 8800 or email
