Tuesday, 1 February 2011

Lease Break Clauses – What Should You Agree In A New Lease?

What should you look for if you are a tenant negotiating a break clause in a new commercial lease?

In my posts Lease Break Clauses – What Can Possibly Go Wrong? and Lease Break Clauses – What If You Change Your Mind? I looked at how you should manage your break clauses, either if you want to terminate your lease, or if you have served a break notice but then subsequently change your mind.

When negotiating a new break clause you should try to end up with a clause which will help you avoid the problems I referred to in those posts.

What will be the break date or break dates?

Will there be only one opportunity to break the lease or several? Will the break dates be specific one off dates, for example on every anniversary of the commencement date? Or will you be able to break the lease at any time after a specified period has elapsed, for example at any time after the first five years of the term?

You will want as much flexibility as possible.

If you pay rent quarterly, try to make the break date a quarter day or, if the break date will fall inside a quarter, include an obligation for your landlord to reimburse you for all rent (and other sums) paid in respect of the period after the break date.

It is a good idea to include a reimbursement clause even if the break date is a quarter day so as to pick up any other  money that might be owed to you after the break date, for example a balancing service charge payment.

Will you have to pay anything?

The landlord might want to negotiate a premium that has to be paid before you can break the lease. This will be a matter for negotiation, but obviously you will want to resist an obligation to pay a price for being allowed to terminate the lease. It is more usual for the flexibility that a break clause gives a tenant to be reflected in the level of rent, both initially and subsequently in any open market rent reviews.

What notice will you have to give?

It is usual to have to agree to give the landlord formal prior notice in writing to activate the break clause. Make sure you are comfortable with the length of notice period.

6 to 9 months prior notice is fairly standard in most commercial leases, unless the lease term is short (say less than 3 years), in which case you will probably want a shorter notice period.

Try to avoid any unusual notice provisions that might trip you up when you come to serve the notice, for example having to serve copies of the notice on someone other than the landlord.

What conditions will you have to comply with for the break clause to work?

Ideally you should insist on an unconditional break clause.

However, your bargaining position may not be strong enough for that. In any case you should avoid the sort of conditions which I refer to in Lease Break Clauses – What Can Possibly Go Wrong?  and which might trip you up.

If you have to agree to include conditions, then I would suggest you limit any conditions to the ones recommended by the Code for Leasing Business Premises in England and Wales 2007 (backed by the Government) as they strike a fair balance between the concerns of landlords and tenants.

The Code says that the only preconditions to a tenant’s break right should be:-
  • The basic rent is paid up to date (not “all sums” or service charge). Note that if the break date is in the middle of a quarter you would still have to pay the whole of that last quarter’s rent, so still include an obligation for your landlord to reimburse you the balance relating to any time after the break date.
  • The tenant gives up occupation of the property. This is not as onerous as having to give up “vacant possession”.
  • There are no continuing subleases. Make sure any subleases you grant expire before the break date and are excluded from the security of tenure provisions of the Landlord and Tenant Act 1954.

The above is a brief outline and you should always seek professional advice.

Here are links to my other posts on break clauses.

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