What is a break clause?
A break clause is widely used in commercial leases to allow either party to terminate the lease before the fixed term expires. The right exists only where the lease expressly includes it; without it, the parties will be bound to the full fixed term unless mutually agreed otherwise.
The break provision itself must explicitly clarify who can exercise the right (both the landlord and the tenant, or just one of them), when the right can be exercised, how much notice must be given, and whether there are any conditions to be satisfied for the break to be effective. The mechanism for the break clause is usually agreed at the outset between the parties within the heads of terms.
Break Clauses Acting for the Tenant
The advantage of a break clause for a tenant is that it provides them with flexibility in what is usually a fixed-term commitment. This may be useful for the tenant if they unexpectedly find themselves in a difficult position during the term of the lease, where they may need to determine the lease for reasons such as the premises has become too large, the rent has become too expensive, the business may need to relocate, to name a few.
A tenant break clause will require a formal written notice to be served on the landlord within a specific break window (i.e. notice served no less than 6 months from the agreed break date). Most commonly, the tenant-break provision is subject to conditions such as payment of all rents up to and including the break date, providing vacant possession of the premises and no breach of any other material covenants and conditions of the lease. If the conditions of the break are met, and notice is validly served, the break is then exercised and the lease ends on the break date.
The tenant-break clause conditions are usually agreed within the heads of terms; however, they should be negotiated to ensure that they are not placing additional risk on the tenant. A tenant break right provides flexibility and reduces long-term risk, which is useful where the future of their business and/or finances are uncertain.
Common pitfalls regarding tenant break clauses include errors in serving the break notice, non-compliance with the conditions, failure to provide vacant possession, disputes over sums due, or missing the break window. Break clauses are technical, and an error or a condition not being met can result in the break notice not being validly served and the right no longer exercisable.
Break Clauses Acting for the Landlord
A break clause for a landlord allows them to determine the lease earlier than expiry of the fixed term, unless mutually agreed otherwise. The landlord may require this if they wish to recover possession of the property sooner than the agreed term, require flexibility for redevelopment, sale, or owner occupation, or seek to manage risk where the tenant’s covenant strength is uncertain.
The landlord’s break clause will require a formal written notice to be served on the tenant within a specific break window. The lease then terminates on the break date. landlord breaks are often linked to redevelopment, demolition or substantial works, sale with vacant possession or tenancy insolvency.
The benefits of a break right for a landlord is that they retain the right to regain control of the premises for a proposed redevelopment or disposition, and can be useful if they require an exit route.
For landlords, the terms of the break clause should be clear and specific to ensure that they can rely on its terms. Where the break provision is to be relied upon in the event of the landlord requiring the property for redevelopment or sale, the clause requires particularly careful drafting to avoid contested breaks, which can lead to costly litigation and uncertainty over possession.
The landlord should also bear in mind that recovering possession early may expose them to a void period.
Negotiations and Drafting Break Clauses
Break clauses are often litigated because they are technical and must be strictly complied with.
The break clause must be clear, workable, and proportionate for both parties, and should provide a fixed break date(s), a reasonable notice period, and clear conditions. For a tenant, they would require a shorter notice period and provision for apportioned sums paid to be returned to them following the break date. For a landlord, a longer notice period, conditions on possession, rents paid, and obligations on yielding up the property and perhaps a penalty. However, where the landlord places too many technical conditions, the provisions may become unattractive to prospective tenants.
Practically, the break notice should be clear for both parties, and we would recommend that the wording is succinct, with a precise definition of the notice and conditions. We would recommend that the break date be diarised well in advance and that conditions be reviewed to ensure compliance. The biggest risks are technical notice failures and onerous conditions. The best negotiation strategy is usually to keep the clause simple, certain and commercially fair.
