Summary
- Break clauses let commercial tenants end a lease early, but assigning the lease can remove this right if the clause is drafted as personal to the original tenant.
- Unless the lease says otherwise, the law generally allows successors in title to use a break right, but express drafting can override this default position.
- Tenants assigning a lease, and assignees taking one on, should check the break clause wording carefully before proceeding, ideally with legal advice.
- This is a plain-English guide on break clauses and lease assignments for Australian commercial tenants and businesses considering transferring or taking on a lease.
- LegalVision, a commercial law firm, specialises in advising clients on lease negotiations, assignments, and break clause rights.
Tips for Businesses
Before assigning a lease, check whether the break clause is personal to the original tenant or passes to successors. Assignees should never assume a break right transfers automatically. Raise flexibility concerns early, and negotiate break clause wording before signing or agreeing to an assignment.
On this page
- Why Break Clauses Are Important for Commercial Tenants
- Who Can Use a Break Clause Under the Lease?
- What Does Assigning a Lease Mean?
- What Happens to a Break Clause on an Assignment?
- What Risk Can Break Clause Loss Create?
- What Commercial Tenants Should Check in a Lease
- Key Takeaways
- Frequently Asked Questions
Lease break clauses are important protections that commercial tenants rely on as a key exit strategy. There may be circumstances in which a tenant wishes to assign their lease to a third party. Moreover, depending on how your lease is drafted, an assignment of it could remove a break right. This can cause problems for future tenants and may affect your ability to assign the lease. This article considers how break clause rights may no longer apply on lease assignment and what commercial tenants should consider when taking on a lease with break clause rights.
Why Break Clauses Are Important for Commercial Tenants
Entering into a commercial lease usually involves committing to a range of obligations for the full contractual term. Though these commitments may be acceptable to a business at the outset, circumstances can change over time. A business may need to relocate, expand into larger premises, or reduce space to reflect changes in staffing levels or trading conditions.
Who Can Use a Break Clause Under the Lease?
A break clause gives you the right to end your lease and will usually specify who may use that right.
In the absence of any clause to the contrary, the law usually allows the original party to the lease and the successors (e.g. a new tenant to whom the lease is assigned) to exercise the break right. Although this is the default position, leases can contain express drafting that alters or overrides it.
Tenants should therefore approach personal break clause rights with caution. While such rights may appear attractive at the outset, they can lose their value if the tenant later needs to transfer the lease. This is particularly relevant where a tenant anticipates the possibility of assigning their lease in the future.
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What Does Assigning a Lease Mean?
Assigning a lease is a process that allows a tenant to transfer its interest in the lease to another business. Once the assignment has been completed, the lease continues, but with the incoming tenant replacing the outgoing tenant and taking on responsibility for performing the tenant’s lease obligations going forward.
When a lease is assigned, the assignee (incoming tenant) generally steps into the outgoing tenant’s shoes under the lease and becomes liable under it. Whether a break clause right passes along with the lease depends on how the break clause is drafted.
What Happens to a Break Clause on an Assignment?
In most cases, the third-party assignee also benefits from the tenant’s rights under the lease. However, not every break clause right will necessarily transfer. Some rights are personal to only the original tenant, and break clauses are common examples.
Where the lease grants only the original tenant the right to terminate early through a break clause, the assignment usually ends that right. A leasing solicitor can review the lease terms to confirm whether the break clause survives the transfer.
What Risk Can Break Clause Loss Create?
The loss of a break right can create difficulties when a tenant seeks to assign their lease, whether to a group company or an external purchaser. Even where the incoming party expects to acquire all the key commercial protections in the lease, it will not obtain the benefit of a personal break right unless the lease expressly permits it.
Tenants often focus on the break date and notice requirements, overlooking who is actually entitled to exercise the break right. Drafting on this point can be technical and easy to misread.
Furthermore, tenants planning a group restructuring involving a lease transfer should review this issue early. Discovering too late that an assignment voids the break right can disrupt commercial plans and reduce business flexibility.
What Commercial Tenants Should Check in a Lease
Before assigning a lease, a tenant should check who is entitled to exercise the break right. The lease may preserve the default position by extending the break to successors in title. Alternatively, it may override this by making the break right personal to the original tenant.
A party taking on a lease by assignment should also not assume that an existing break clause will benefit it. The assignee should carefully review the lease’s wording to determine whether the break right is passed with the lease or is restricted to the outgoing tenant.
If you are moving out of your leased space and assigning the lease to another party, you are required to notify your landlord and obtain their consent. Use this free proforma template for this purpose.
Key Takeaways
Break clauses provide an important risk-management tool for commercial tenants by allowing them to exit a lease early. However, tenants should understand that lease assignment can remove that protection in some cases.
In the absence of express drafting saying otherwise, the law allows the original party to the lease and its successors to use a break right. However, where a lease makes a break right personal to the original tenant, an assignment will usually end the break right.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced leasing lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Does assigning a lease automatically remove a break clause?
Assigning a lease does not automatically remove a break right. In many cases, the assignment will pass a break clause to the assignee.
Can a tenant lose a break right when assigning to a group company?
A group company is a separate legal entity, so if the lease makes the break right personal to the original tenant. Then, the tenant will usually lose the right when it assigns the lease to a group company.
What should a tenant check before assigning a lease with a break clause?
A tenant should review the break clause wording to confirm whether it extends to successors in title or is personal to the original tenant only.
Can a landlord impose new conditions when consenting to an assignment?
A landlord can impose reasonable conditions on granting consent to assign. This includes requiring guarantees or confirming the assignee’s financial standing.
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