Break Clauses in Commercial Property Leases

What is a commercial property lease?

commercial property lease is a formal agreement between the landlord and the tenant of commercial property. The tenant will typically be renting the property from the landlord for the purpose of conducting their business from those premises.

Commercial property leases are common among businesses because they allow more flexibility than they may have if they own their own property. Leasing property for a business means it will be easier and quicker to move to alternative premises when required.

Break Clauses

What is a break clause?

In a competitive commercial property market, tenants need as much flexibility in their leases as possible to protect their future business interests. For this purpose, there will usually be a break clause in the lease.

A break clause enables either or both of the parties to end the lease early on a specific date (or dates), or at any time during the term of the lease. If, for example, the needs of the business change dramatically over a short period of time, it may be necessary to move to different sized premises. Exercising their rights under the break clause should theoretically enable the tenant to do this.

The option of being able to walk away from the lease at any time clearly benefits the tenant. The landlord, on the other hand, could be left with vacant premises and the loss of rental income and, in some cases, a property in a worse condition than before the tenant entered the premises.

However, it is important to understand that exercising a break clause is not always straightforward. It can also prove costly for the tenant if serving notice to quit the lease is ineffective, for example, if a condition has not been met.

Can the landlord attach conditions to a break clause?

Under the Lease Code, the only pre-condition to tenants exercising a break clause should be that they are up-to-date with the main rent, give up occupation and “leave behind no continuing subleases”. In practice, landlords often seek to impose further conditions on tenants to protect its own interests. Examples include that the tenant must:

  • comply with all tenant covenants in the lease, such as keeping the interior of the premises in good repair
  • pay all rent and any other payments up until the date of termination under the break clause

Often, a landlord will insist on full compliance with the conditions imposed. If the tenant materially breaches the conditions, they may not be able to validly exercise the break clause. This means that break clauses can be somewhat of a trap for unwary tenants. The question is, what amounts to a material breach? A material breach is a significant breach, ie. something more than just trivial or minor.

What amounts to a material breach?

Case law has been developed in the courts to establish what can amount to a material breach, and individual cases are decided according to the facts of the case. A guiding principle is that materiality should be assessed with reference to the landlord’s ability to re-let or sell the property without delay or additional expense.

That said, various factors will be considered when determining whether there has been a material breach of the conditions imposed on a break clause, including:

  • the actual breach
  • how the damage caused by the breach has been calculated
  • the extent of the tenant’s efforts to avoid breaching the condition
  • whether the landlord has a genuine interest in strict compliance of the condition, or is simply using it to stop the break clause coming into play

For example, a landlord insisted that the tenant fully repair the building before exercising the break clause. The tenant undertook various repairs. However, the landlord did not reply to the tenant’s requests to inspect the progress of the work. Once the works were complete, the tenant exercised the break clause. The court found that the tenant had done enough to show material compliance with the conditions of the break clause because of the amount of money spent, and the fact that the tenant attempted to allow the landlord to check on progress of the works.

It is common for landlords to impose a strict condition in relation to effective service of notice to the landlord of the tenant’s intention to exercise the break clause. Case law reiterates that tenants must comply with strict requirements for service of notice as set out in the lease, otherwise they may lose the right to break the lease.

What is the situation in the case of joint tenants?

Usually, if there are joint tenants under a commercial property lease, a break clause can only be fully exercised by both tenants. However, one tenant may have authority to exercise it on the behalf of the other.