What is a break clause, when should you exercise it, and under what circumstances?

Put simply, a break clause is a term in a contract that allows for the early termination of the contract prior to the agreed and scheduled end date of the contract. They are often found in commercial property leases and are now more desirable in some regards than ever before.

With many businesses suffering from the impacts of COVID-19, tenants and landlords may benefit from reviewing the terms of their lease to see whether they are able to determine their lease before the agreed end of term date.

COVID-19 will change the way businesses operate and will fundamentally change the relationship between tenants and landlords. For example, the traditional method of working from an office five days a week will likely never return for the vast majority of businesses and their employees. As a result, offices may not be required to such a large extent and many businesses may consider downsizing their current premises or moving their staff to home working permanently. A break clause would help them achieve this if it is possible.

However, exercising a break clause requires certain steps to be taken. Every break clause will come with its own conditions, and these could include ensuring that rent and service charges are paid up to date; the tenant gives vacant possession of the property; and the tenant removes all fixtures and fittings before leaving the property.

If you are a tenant seeking to exercise a break clause, we would always advise ensuring that you receive written confirmation from the landlord that there are no rent arrears prior to the break date. This is especially important when taking into consideration the fact that you may have received rent and service charge concessions during lockdown as many landlords have not been required to provide their usual services (utilities, cleaning, decorating, etc) if businesses have been closed.

If you are a landlord, please take extra care and attention to ensure that your break clause has been correctly drafted – the real-life consequences of failing to do so can be stark. We were recently instructed by a tenant in respect of a break clause and advised them that the drafting of the clause was so poor it meant that they were not obliged to comply with any conditions prior to serving the break clause. Our client could have effectively brought the lease to an end on the break date without paying any service charge or rent arrears. Luckily for the landlord in this instance, our client chose to pay the arrears in full!

So, how do you serve a break clause? Again, the most important element to consider is that the break clause is served in accordance with the provisions contained in the lease itself. The length of notice required will vary in each lease – some contain a 6-month notice period while some will require significantly longer. On that basis, it’s vital that anyone seeking to exercise a break clause does so far enough in advance to allow for the notice period to be served. It’s also worth considering and investigating how the break clause should be served – many allow for electronic service of the notice but in some instances, it will require serving in paper format. Naturally, the latter takes longer than the former!

Finally, it should be noted that any break clause served validly and in line with the terms of the contract cannot be withdrawn. For that reason it is vital that tenants are fully advised on the implications of serving a break notice. We would strongly advise that if a tenant is seeking to negotiate a new lease on new terms that this is done well in advance of serving the break clause. By failing to do so you may find yourself unable to negotiate new terms after the break clause has been served and may be left with no option other than to leave the property.

For more information or to discuss this in more detail, please contact Chris Else today on 01283 526 200 or email chris.else@elselaw.co.uk. 

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