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If you are a commercial tenant in the UK, you may have a lease agreement for the property you rent as your commercial premises. Your lease agreement will detail your business use of that space, including your rent level and lease term. A commercial property lease can vary in terms of its clauses. As such, you may find yours has a break clause.
Break clauses are now relatively standard in commercial leases and can be helpful in a commercial lease agreement should you wish to end the tenancy early. However, there are key considerations you should be aware of to ensure you exercise the clause correctly. Unfortunately, break clauses are a primary reason for disputes between commercial landlords and tenants, and a court will interpret a break clause in the strictest sense. This article will detail key points you, as a commercial tenant, need to be aware of when reviewing break clauses in the UK.
What is a Break Clause?
A break clause is a provision within a commercial lease that provides a mechanism for either your commercial landlord or you as the commercial tenant to terminate the lease before the fixed term date. Once a lease comes into existence, it is hard for either party to unilaterally end it before the lease expires. Nevertheless, a break clause may specify a selected date you or your landlord can exercise this right which is often the mid-way point in your lease term.
Alternatively, if it is a rolling break clause, you can use it at any point during the fixed term of your commercial lease. You should look at the wording of your break clause carefully to ensure you interpret it correctly.
A tenant or landlord only break clause will mean that only the landlord or the tenant can exercise the right to break the lease. Accordingly, this is more beneficial to the one party with the right. A mutual right means that either the landlord or the tenant can break the lease. This can be problematic for some tenants who have built up significant goodwill over a long period of tenure and should influence initial negotiation and commercial thinking around investment in works and what incentives the landlord is prepared to provide you with.
Let us explore points that you, as a commercial tenant, should be aware of in terms of break clauses.
Preconditions
Notably, you may need to comply with any preconditions your lease stipulates to use the break clause. You should make yourself aware of these at the outset of your lease to ensure you comply. You should also note that it can be challenging to prove that you did comply with these when you exercise a break clause.
Typical preconditions can include:
- rent must be up to date;
- vacating the premises by the break date, consisting of removing all contents, leaving the premises in good repair and possibly even redecorating;
- not to leave any subleases in place;
- to ensure you pay/are up to date with service charges; and
- ensure insurance payments are up to date.
Further, payment conditions often include that payment is due for a period after the break date. However, your lease requires you to make it before the date.
Break Notice
As a commercial tenant with a break clause in their lease agreement, you should know how to exercise it. Break clauses in commercial leases usually detail that you must give your landlord a break notice six months before the break date.
Your lease may also detail how you should serve your break notice. For example:
- the use of a set form;
- the address to send the notice to;
- whether the notice has to be in writing;
- if the notice needs to be by hand; and
- whether to use first-class post or not.
Performance of Covenants
Whilst a break clause may detail preconditions for you as a commercial tenant to use it, there are some covenants of the lease it will not include as preconditions. For example, it may not include your repair and redecoration obligations for the commercial premises. Therefore, if you do not comply with these, your landlord may not be able to stop your use of the break clause. However, you should be aware that they can still sue you for any financial loss due to your non-compliance even after you use the break clause.
What Are Six Month Break Clauses?
A six month break clause can, depending on how the tenancy agreement words it:
- allow one or both parties to terminate the lease provided they give at least six months notice; or
- entitle one or both parties to terminate the lease only after at least six months from the date the lease commenced.
It is also possible to have a six month break clause that requires six months’ notice but which can only be relied upon six months after the lease commences.
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Break Clauses and Other Lease Provisions
Most break clauses have their own sets of conditions that the party seeking to rely on must fulfil in order to exercise the right to break the lease early.
Rent Review Clauses
Rent review clauses specify the right of the landlord to raise the rent at predetermined dates throughout the course of the lease. This includes the tenant’s right to benefit from downward rent reviews, which decrease the rent. Some tenant-friendly leases may have rent review clauses that enable the tenant to break the lease if the landlord raises the rent or raises it above a certain threshold.
Underleases
The general rule is that where one party exercises a right under a break clause, any underlease also is terminated. An underlease refers to any sublease.
However, many commercial leases may contain exceptions to this general rule. If you intend to purchase or acquire a sublease, you should ensure that your solicitor inspects both the sublease and the terms of the superior lease.
Confidentiality
A landlord may not wish for the tenant to publicise the fact that either party exercised the break clause. In some cases, therefore, there may be a clause that requires the tenant to undertake not to disclose when a break lease is engaged.
In principle, there is nothing against a similar provision that benefits the tenant from being incorporated into the lease. However, this is rare in practice.
This cheat sheet outlines what you should be aware of in your lease agreement.
Key Takeaways
A break clause in your commercial lease agreement allows you or your landlord to terminate your lease agreement before the end term date. This may be on a specific date, or you may be able to exercise this at any point during the lease term. Whilst break clauses can be advantageous to you as a commercial tenant, there are points you need to look out for in these clauses. For example, you should ensure you are aware of any conditions you may need to comply with to use the break clause. This will likely include your rent payments being up to date. You should also ensure you know how to exercise a break clause. Your lease agreement may detail exact requirements, and your use of the break clause is invalid if you do not comply with these.
If you need help understanding break clauses in commercial leases in the UK, LegalVision’s experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A break clause in a commercial lease agreement allows the lease to come to an end before the lease end term.
As a commercial tenant, there are many points you need to be aware of in terms of break clauses. For example, they may require you to comply with preconditions to use the clause.
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