The Use of Break Clauses in Commercial Property Leases – issues to consider

Commercial Property Lease

What is a commercial property lease?

a commercial property lease is an agreement which is entered into by a landlord and tenant of which the subject is a commercial property. The tenant in this respect will be a business and will be renting the property as premises in order to undertake the performance of their business. Commercial property leases will be the norm for most business as a business would not necessarily want to own their own premises as that would rule out the flexibility of moving to a bigger or smaller alternative premises.

Break Clause

What is a break clause?

In the current competitive commercial property market tenants will want as much flexibility in the commercial lease as possible in order to protect their future business interests as it may well be in their interests to be able to move premises for a variety of reasons.

For this purpose tenants will wish to introduce a break clause to the commercial lease – this means that they will be able to bring the lease to an end part of the way through the original agreed term. If for example a business changes dramatically over a short period of time there may be a desire to move to a larger or smaller premises – a break clause would enable them to do this.

Benefit to tenant versus loss to landlord

The option of being able to walk away from the lease at any time is clearly of benefit to the tenant, whereas it may not be of such huge benefit to the landlord as they will be left with a vacant premises and the loss of rental income. In some situations this may be made all the worse by the fact the premises have been left in a worse condition then before the original lease.

The availability of a break clause must therefore be offset against the needs of the landlord.

Landlords Conditions attached to a break clause

In order to protect themselves a landlord of a commercial property will often attach conditions to an option for a tenant to bring the lease to an early conclusion.

Examples of likely conditions imposed by landlords

Conditions that are likely to be imposed by landlords will include the following:

  • Requirement to comply with all tenant covenants in the lease – this will usually include repairs to the property

  • Requirement to pay all of the rent and any other payments up until the date of termination under the break clause

Often a landlord will insist on absolute compliance with the conditions imposes on the tenant when exercising a break clause such as painting the premises using three coats of paint not two. As a consequence of this it is likely for a landlord to claim that the tenant has breached the conditions when exercising the break clause.

Accordingly case law has developed in order to establish whether there has been a material breach of the conditions.

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For more information on:

  • Material breach of the conditions
  • Example of issues with break clauses
  • Condition of Notice required for the break clause
  • What is the situation if the tenants on a commercial property lease are joint tenants?