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Breaking bad or breaking even – how to turn break clauses into an advantage

Including break clauses in commercial property leases allows both tenants and landlords the flexibility to terminate a lease before the agreed fixed term has expired and both parties can turn break clauses into an advantage.

The economic downturn has resulted in an increased number of landlords agreeing to break clauses in a bid to make their properties more attractive to businesses. While this allows some flexibility for both parties, these can prove to be the danger that knocks.

The potential pitfalls could see landlords left with the real risk of costly empty properties while tenants may face uncertainty over the long term security of the roof over their business.

In the current climate in particular, both landlords and tenants should consider how to protect their commercial interests before signing on the dotted line.

Strict conditions within a commercial property lease can provide protection with either ‘reasonable’ or ‘complete’ compliance required before a break clause is allowed and an early release from the contract granted to either party.

If either the landlord or tenant fails to comply with these, the right to terminate the lease becomes redundant and the contract continues unaffected.

Some simple steps can be taken to take the potential sting out of break clauses:

1. Specify break notice terms

Specifying that a break notice has to be provided in a specific form or including requirements for where a break notice must be served within the lease can provide some protection with a failure to comply invalidating the break notice.

Both parties to a lease should ensure that the service and format provisions required are met before a break notice is agreed.

2. Set break clause parameters

The break clause will usually provide details of when the right to terminate the lease can be exercised and clarify the required notice period.

It is essential to check dates to confirm that the party wishing to come out of the lease early has the right to do so.

3. Cover all basis before the termination of a lease can be exercised

Depending on the provisions in a lease, additional requirements can be added in order to provide greater security for both landlords and tenants so neither party is left high and dry.

These may include:

    • Highlight that all rent must be paid – unless a commercial property lease states otherwise, in the event that a break clause falls between quarter days, full payment of the rent due for the whole quarter must be made.A tenant must not apportion the rent to the break date itself and should ensure that payments are made in cleared funds unless the landlord has expressly agreed to accept a cheque.A tenant should also pay all the outstanding sums due, even if these are in dispute. The payment however, can be made on a ‘without prejudice’ basis allowing for the matter to be disputed at a later date.
    • There must be vacant possession – if a tenant agrees to carry out work on the property before the agreed break date, this must be completed and vacant possession given no later than the break date.It may be necessary to hire a building surveyor to verify that the work required for vacant possession has both been completed and meets the required standard.
    • Compliance with tenant covenants – the most commonly breached covenants relate to the state that a property is left in with some tenants leaving the space in a state of disrepair which may include both decorative and more serious, and costly, damage.

In these circumstances, it is recommended that a building surveyor is brought in to report on the extent of the dilapidations and to provide an estimated cost of reinstating the property to its original condition.

Landlords may choose to serve a notice on their tenants requiring any remedial work to be completed in these circumstances. The timing and format of this should ensure that the landlord does not prejudice reliance on the break clause.

The law currently strongly leans in favour of tenants making it difficult for landlords to assert their rights in order to protect commercial interests. Taking some simple precautionary measures, as set out above, can make the difference between breaking bad and breaking even.

Linder Myers’ commercial litigation team has extensive experience in landlord and tenant issues and can advise both parties on the best approach to protect their interests before entering into a commercial property lease. Contact a member of our team on 0800 042 0700 for further advice.

Find out more about our Commercial Litigation department
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