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.

Material breach of the conditions

The following factors will be taken into consideration when establishing that a material breach of the conditions imposed on a break clause has occurred:

  • The actual breach

  • The way that 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 whether he is simply using it to stop the break clause coming into play

Example of issues with break clauses

An example of where the above issues have come into play was involved in a case whereby a landlord insisted on the tenant fully repairing the building before they exercised the option for the break clause. The tenant then undertook various required repairs inviting the landlord to come and view the progress of the work on numerous occasions while the work was being undertaken. The landlord never replied to the tenant and so once the work was completed the tenant exercised the break clause paying the remaining payments and handing back the keys.

The court held that the tenant had done enough in order to show material compliance with the conditions of the break clause due to the amount of money spent and the fact that they attempted to allow the landlord to check on the progress of the work.

Condition of Notice required for the break clause

Often one of the conditions imposes on a tenant when enacting a break clause is that he gives adequate notice to the landlord of his intention to break the lease. In one specific case the condition of the break clause was that notice given by hand or by post had to adhere to a specific procedure but notices given by any other means would not be considered to be fully given until they were received by the landlord.

In this case the receipt of notice provided by fax was not acknowledged by the landlord until long after the date of the break had passed.  It was held that the break clause had not been fully served in accordance with the terms specified in the lease meaning that the tenant lost the right to break the lease.

What is the situation if the tenants on a commercial property lease are joint tenants?

Unless there is a specific provision in the lease stating that this will not be the case, where the tenants to a commercial property lease are joint tenants a break clause can only be fully exercised by both tenants. However, if one tenant has the authority to exercise it on the behalf of the other than this will be permissible.