Written by Benedict Keane, Solicitor at Spire Solicitors LLP Norwich office.
When negotiating a commercial lease one of the most important decisions that a tenant needs to make is the length of term. A lease must be for a fixed term. The lease then creates obligations and liabilities that exist for the whole of the period of the term. If the lease is for a moderately lengthy period and if the tenant has concerns over the ongoing liabilities, then the tenant should consider negotiating a break clause at the outset.
A break clause is, in effect, a “get-out” clause. In other words it gives the tenant the opportunity to terminate the lease prior to the expiry of the fixed term referred to above. Normally the break clause would provide that provided the tenant gives written notice to the landlord of not less than a certain period, e.g. six months, then upon expiry of that notice, the lease will end, i.e. the break date.
Sometimes the landlord will try and make the break clause conditional on certain pre-conditions, e.g. that the tenant has complied with the covenants under the lease. This should be resisted, not least because it is frowned upon by the Code for Leasing Business Premises which provides that the only pre-conditions to the tenant exercising the break clause should be that the tenant is up to date with the main rent, that the tenant will give up possession on the break date and will not leave behind any continuing subleases. In other words, any matters relating to the state and condition of the premises, or what has been left behind or removed, should be settled after the break date, like with a normal lease expiry. The tenant should also make sure that if a break date falls between two rent payment dates that provision is made for repayment of any such rent paid in advance for the period after the break date.
On the basis that the tenant is successful in negotiating a break clause (and of course there is nothing to prevent a lease having more than one break date), then the tenant must be extremely careful to exercise the break by way of service of the notice. The notice must be served in accordance with the terms of the lease both as to the period of notice required and in the prescribed format (if any). Most importantly, the notice should be served on the correct landlord for the time being and at the correct address as provided for in the lease or under statute, where the lease is silent. Otherwise, the tenant may serve an invalid notice and lose the benefit of the ability to terminate the lease early. As such failure will necessarily have financial repercussions, it is therefore important that the tenant, both at the outset and at the potential time to break the lease, should take professional advice.