Property Leases: What is a break clause?
Break clauses are a useful tool for both landlords and tenants to end a lease before the end of the term. Below, we outline the usual lease provisions together with the main conditions for a break to be effective, particularly from a tenant’s point of view.
What is a Break Clause?
A break clause is an explicit right for the landlord, tenant or both to terminate the lease at an agreed point. This can be a specified date (or dates) or can be a rolling break (which enables the relevant party to break at any time during the term of the lease).
Break rights are often a deal breaker for tenants who may not wish to tie themselves down to a fixed term lease because in times of uncertainty, they may want flexibility to fit in with their future business plans.
For a break clause to be effective, a number of specified conditions must be met. The courts have construed these conditions strictly. All tenants are advised to obtain advice in order to ensure that they comply with these as failure to do so may result in lease a failed break right and a continuing lease.
Common conditions include:
- At least 6 months notice: the tenant must give the landlord written notice of its wish to break at least 6 months before the break date. Tenants are advised to retain proof that this was sent (e.g. by special or recorded delivery and an acknowledgement of receipt by the landlord).
- Payment of rent: rent and all other sums have been paid up to the expiry of the break notice. If rent is paid quarterly, this may mean paying rent and other sums due, beyond the rent payment date (such as any interest on late sums or penalty fees payable to make the break).
- Vacant possession: the tenant must give vacant possession of the property and surrender possession so the landlord can use the property.
- Material breach of tenant’s covenants relating to repair: Although less common now, this term still exists in some leases. This clause would require the property to be in good repair and breaches to be rectified. Tenants are therefore advised to do a thorough check of the repairing obligations in the lease to ensure that it is not bound to the lease just because repairs have been neglected.
Other points to consider
- Recovery of overpaid rent and service charge: If the rent provisions are drafted so that rent and service charge is paid in advance beyond the break date, tenants should include provisions to recover overpaid sums. To negate this issue, the parties may agree to put the break date on a rent payment date instead of anniversary of the date of the lease (as is usual).
- Personal Break Rights: Break rights can be personal to a named tenant (i.e. the original tenant to a lease). Provided the lease is drafted in this way, an assignee of the lease will not be able to rely on the break clause to end the lease.
- Talk to the Landlord: A tenant may be unaware of sums owed by it under the lease and although the landlord is not obliged to confirm, it is wise to ask the landlord to confirm compliance with sums owed. Similarly, if the tenant needs to carry out repairs at the property, the tenant may wish to first obtain a list of items in disrepair from the landlord (a schedule of dilapidations) before carrying out any works.
- Service of Break Notice cannot be withdrawn: Once a break notice has been served on the landlord, unless the landlord agrees, the tenant cannot rescind its own notice. Tenants should only serve a break notice once its long term property plans have been put in place.
- Yield up and reinstate: As the lease is coming to an end, the tenant will still have to reinstate the property in accordance with its repairing obligations. That will usually mean removing alterations, improvements and any signs attached to the property as well as redecorating in the last 6 months of the term.
- Lease Code 2007 The Code for Leasing Business Premises in England and Wales 2007(Lease Code 2007) recommends that:
- “The only pre-conditions to tenants exercising any breakclauses should be that they are up to date with the main rent, give up occupation and leave behind no continuing subleases. Disputes about the state of the premises, or what has been left behind or removed, should be settled later (as with normal lease expiry)”.
- The Lease Code 2007 states that the landlord should inform the tenant of any proposed lease provisions that do not comply with the Lease Code 2007 and give reasons for the departure. The Lease Code 2007 can be a useful tool for Tenants when negotiating the terms of a break clause.
- Protected Leases (Landlord and Tenant Act 1954): If a business lease has been contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954 (LTA 1954), a break notice will end the lease in accordance with its terms. The landlord or tenant only has to serve the break notice to bring the lease to an end.
- If the lease has not been contracted out, a break notice will only end the contractual lease in accordance with its terms, but a statutory tenancy under the LTA 1954 will come into effect when the contractual lease ends. If a landlord is breaking the lease, it will also need to serve notice on the tenant under section 25 of the LTA 1954 in order to terminate the statutory tenancy. It is not common therefore, to see a landlord’s break clause in a non-contracted out lease for this reason.
A tenant’s break notice is not only ends the contractual term but also the protection of the Landlord and Tenant Act 1954 (LTA 1954) since such a notice is a ‘notice to quit’ for the purposes of LTA 1954.
Whilst break clauses can seem relatively straightforward, they can cause a number of issues and leave the tenant bound under the lease, if not exercised properly. Very careful consideration must always be given to the exercise of any break.
This article is intended as a general guide and should not be relied upon for specific legal advice.
If you have any queries about break rights and break clauses, or want to find out more about commercial leases, please contact Maria Guida, Partner, in our Real Estate team, or email your query to firstname.lastname@example.org; call us on 01276 686222 or visit our website https://www.herrington-carmichael.com/contact/