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Exercising your break clause as a commercial tenant

Written by Ian Hylton on Thursday, 10 September 2020. Posted in Commercial law, Legal

Many businesses have found themselves with a vacant commercial premises as a result of the coronavirus pandemic

Exercising your break clause as a commercial tenant

Many businesses have found themselves with a vacant commercial premises as a result of the coronavirus pandemic, forced government closures and remote working and, as a result, will be looking to end their commercial tenancy agreement for premises they deem as no longer necessary. 

A tenant cannot simply cancel their tenancy, unless they had the foresight to negotiate a break option when they took the lease. Even then they must exercise the break clause set out in their lease and follow the required legal process to ensure that they do not open themselves up to the risk of dispute. Here are the main things to keep in mind if you plan to exercise your break clause as a commercial tenant. 

What is a break clause?

A break clause is a negotiated right that enables a tenant or landlord to ‘break’ the contractual term of a lease, which would result in the lease coming to an end early. The option to break is not an implied right of either party and must be agreed between you and your landlord. A well-drafted commercial lease will detail who, when and how the break may be exercised, and you should undertake a thorough review of the terms of your lease and assess your options. 

It is important that a break date is agreed and established. This is the date that the lease will come to an end and dictates how and when certain actions must be taken. Usually, a right to break will be expressed as either a fixed or rolling break.

A fixed break option means a party has one or multiple opportunities to bring the lease to an end on a particular date. Fixed break dates can be expressed in the tenancy agreement, or calculated by reference to a period of time, such as anniversaries of the term. 

Rolling break options, on the other hand, mean the exercising party may be permitted to break the lease at any time during the term, or any time after a specific date or event, provided they have given the other party the required notice. 

Serving notice 

Typically, the condition of a commercial lease is that for the break to take place, you must have served a written notice to your landlord. This will usually be  three to six months in advance of the break date but it can be longer. The notice should also refer to the lease and state the date that you intend to bring it to an end.

You should check the notice requirements contained in your lease carefully as, if you fail to comply with them, it may invalidate the notice and you may lose the opportunity to exercise the break. A notice will invariably have to be given in writing. Be warned, many leases still exclude emails from the definition of writing. 

In addition to serving the notice, you should also consider whether there are any additional pre-conditions you must meet before the lease is determined, such as paying all rent and other sums in full before the break date. Again, failure to adhere to all condition precedents will invalidate the break. 

It is also worth noting that, unless the lease expressly states otherwise, any annual rent paid in advance for a period beyond the break date is non-recoverable and the landlord does not have to return this to you. 

For the break notice to take effect, you must have left the property and returned the keys to the landlord on or before the agreed date. Sometimes, there is a condition that requires you to  hand the property back in the condition required by the repairing and redecoration covenants established in the lease. Under these circumstances, if you fail to return the property in the condition required, the break will be invalid and you will have to see out the lease. So watch out for any condition to the break that requires you to “comply with material covenants”. 

If you are a commercial tenant hoping to exercise your break clause, you must take time to familiarise yourself with your lease and obligations. If you are struggling to navigate the terms and are unsure where you stand legally, you should seek the advice of a qualified professional who will be able to guide you further and identify the best way forward for you and your business. 

About the Author

Ian Hylton

Ian Hylton

Ian Hylton is partner in the real estate & development team at Blaser Mills Law.

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