Whether you are a landlord or tenant, the inclusion of a break clause in a lease can be vitally important. A break right allows the lease to be terminated early by the party with the benefit of the right. Break rights are invariably subject to specific conditions which are strictly construed against the party with the benefit of the right.
Litigation over break clauses has increased exponentially in recent years, owing to the challenging economic climate. It is therefore essential that both landlords and tenants understand the impact conditional break clauses can have on a tenant’s right to terminate its lease.
What is a break clause?
A break clause confers a contractual right to terminate a lease before the end of the contractual lease term. Usually, the right is drafted to allow termination on one or more specific dates during the lease term or on a rolling basis at any time after an initial period. Break dates must be clearly identifiable with no room for ambiguity. Notice must be served to operate the break and the notice must, in most cases, state the break date. The lease will define the notice period and set out the method of service.
If sufficient notice is not given, or the notice is invalidly served, the break will not operate so it is vital to get it right.
Conditionality of break clauses
Most tenant break rights contain some element of conditionality. This is the main source of litigation and raises issues both when drafting the lease and when exercising the right. Conditions must be performed strictly, even when the result seems unfair.
The three most hotly debated conditions are:
- Payment of rent
- Giving up vacant possession
- Compliance with tenants’ covenants
1. Rent(s)
The courts have made it abundantly clear that where a break date falls between quarter days, the tenant must pay the full quarter’s rent and not apportion it unless there is very clear wording to the contrary. There is no automatic refund of overpaid rent in these circumstances: the lease must provide for it.
The definition of rent(s) in the lease and calculation of interest on late payments is critical and disputes over whether all rent(s) due under a lease have been paid often emerge. In one case, a tenant lost its break right over a mere £130 which the landlord had never demanded.
Tenants should keep a record of all rent(s) and interest paid during the course of the lease so that there can be no ambiguity over the sums that must be paid to allow the break to operate.
2. Vacant Possession
One of the most recently disputed provisions is the issue of vacant possession. The legal definition of vacant possession requires the tenant to make the property available at the break date in a state in which a buyer or new tenant can occupy it, both physically and legally.
While this may appear easy to establish, there has been significant debate over these requirements. The test requires more than simply giving up occupation, and includes ensuring that: all goods and rubbish, and all tenant fixtures and fittings are removed; all keys have been returned to the landlord; and all persons have vacated.
Tenants should try to restrict the condition to simply giving up occupation by the break date. A landlord should be aware that, if it has agreed to give a tenant notice requiring reinstatement of alterations, it will need to do this prior to the break date and that any period of notice should be shorter than the notice required to be given by the tenant to exercise the break.
3. Tenant’s Covenants
A requirement for compliance with all tenant covenants under the lease is a particularly onerous hurdle to overcome. Many older leases are qualified by reference to ‘substantial’ or ‘material’ compliance, or compliance ‘to the reasonable satisfaction of the landlord’ and some landlords still try to impose such conditions in modern leases. While these tests afford more room for negotiation and appear to be a concession by landlords, in practice they simply create a fresh set of problems for tenants as it is almost impossible to predict what steps a tenant must take to materially or substantially comply with its repairing obligations.
Where a tenant is subject to such a condition, the landlord has no duty to communicate its requirements for compliance to the tenant in advance of the break date. A tenant should therefore always try to avoid this condition altogether and, if the landlord insists on it, should consider seeking a reduction in the rent or the term, to reflect the resulting uncertainty.
The absence of a condition to comply with lease covenants does not impede a landlord’s rights following the break (for example in relation to dilapidations) but it will prevent the break from failing on that basis.
The importance of drafting and interpretation
Recent court cases have shown that the drafting and interpretation of break rights is fundamental to their effectiveness. The courts will construe any ambiguity in a lease against the party seeking to rely on it. Any conditions attached to the break right must be drafted clearly, and interpreted in line with case law, to avoid losing the right for non-compliance.
What you should do
Break clauses should be negotiated with the above in mind and wherever possible the heads of terms should clearly set out the parties’ intentions over breaks. We understand how important it is to tenants to make sure break rights are effective and that any misunderstanding or inability to break can cause real hardship where tenants expected to be able to move on from premises, and are prevented from doing so unless they can assign the lease or sublet the premises.
If you would like any further advice on this matter, whether this is in regard to the drafting and negotiation of new leases or in respect of an existing lease, please contact Stuart Burns ([javascript protected email address]) or another member of our Commercial Property Team who would be happy to discuss the matter with you.
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.
