Tuesday, 13 October 2020

Lease Break Clauses - Finding Your Way Out

 One inevitable consequence of the pandemic will be that many tenants are now lumbered with commercial premises they no longer need or want.

 If this is you, you have a break clause in your lease, and the timing under that clause is right for you, then you will want to use it as your way out.

 Unfortunately, break clauses are the banana skins of the commercial lease; slip up and you can be locked in for the duration.

 You must first ensure that the break notice is served correctly and at the right time.

 Where the lease requires the break clause to be served at a particular address, by a particular person, on a particular person, or by a particular mode of service - all such stipulations must be complied with to the letter.

 Time will be of the essence too in respect of the time limits specified in the clause.

 If, for example, the lease requires not less than 6 months’ written notice before the break date, then it’s a good idea to serve the notice in good time before that 6 months period starts so there can be no argument over whether or not the landlord received the notice in time.

 Sometimes a tenant might be lucky enough to have a break clause with no conditions attached to it. It’s more usual though to find some conditions within the clause that must be satisfied to bring the lease to an end on the break date.

 All conditions attached to the break clause must be fully complied with otherwise the lease will not end on the break date – and if there are no subsequent break dates giving you another go, that means you are on the hook for the duration of the lease term.

 There have been many occasions over the years where a tenant has lost its right to terminate a lease for a trivial breach of such conditions, even though the landlord has suffered no disadvantage.

 This is because break clauses are interpreted by the courts strictly, not commercially.

 Most conditions are likely to be absolute, for example requiring payment of all rent up to the break date.

 One trap that might occur there is that if the break date falls within a quarter and the rent is payable quarterly, then the last payment before the break date must be made in full (a full quarter’s payment), as there is no common law right to apportion the rent. Whether or not the tenant gets back the portion paid in respect of the period after the break date will depend on whether there is a suitable provision in the lease requiring the landlord to reimburse the tenant.

 Conditions requiring a tenant to give “vacant possession” on the break date have given rise to many disputes over the years as to the precise meaning of that term, and especially where items have been left behind at the premises.

 There may also be qualified conditions requiring “material” or “substantial” compliance with tenant covenants. On the face of it those kinds of condition may seem less onerous, but the problem is there’s less certainty. You should therefore take advice on how best to go about complying so as to avoid giving the landlord grounds for claiming the conditions have not been satisfied.

 There are too many examples of break clause conditions, both absolute and conditional, to include them all in one blog post.

 You can see some examples in the various posts on this blog under the label “Break Clauses”. Most of those posts are quite old now though, so they are really just an illustration of the sort of conditions out there and of the kind of things that can go wrong.

 You should always take legal advice on your specific situation and importantly this should be before serving the break notice in the first place and on what conditions must be satisfied and how best to go about satisfying them.

 You should also keep checking with your advisors before the break date to ensure you are doing everything you need to do to ensure you comply.

 The consequences of getting it wrong are too expensive to take the risk.

 Oh, and if after serving your break notice you change your mind and want to stay in your premises after all, then that’s complicated too – see my previous blogpost!

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