Break Clauses in Commercial Leases: Tenants Beware
A break clause in a commercial lease can allow either the landlord or the tenant to terminate prior to the expiry of the fixed term. The right may arise on one or more specified dates, or may be exercisable on a rolling basis.
It is common for leases to specify conditions for the operation of the break. Great care should be taken when negotiating and exercising a break clause, as any conditions must be strictly performed.
Such conditions may include:
- that the tenant has paid all rents (or all payments) due;
- compliance with the tenant covenants in the lease (such a requirement should be resisted by the tenant in the course of negotiations);
- the tenant giving vacant possession of the premises.
The Code for Leasing Business Premises in England and Wales 2007 recognises the dangers to tenants, recommending that:
The only pre-conditions to tenants exercising any break clauses should be that they are up to date with the main rent, give up occupation and leave behind no continuing subleases. Disputes about the state of the premises, or what has been left behind or removed, should be settled later (like with normal lease expiry).
However, the Code is voluntary and the conditions imposed by the Landlord will depend on the bargaining powers of the parties during negotiations.
Service provisions will also be strictly construed. Further, time is of the essence with regard to any limitations specified in the lease.
Case law poses further difficulties for tenants. In Marks and Spencer plc v BNP Paribas Securities Services Trusts Company (Jersey) Limited and another  UKSC 72, the Supreme Court ruled on the facts that the tenant was not entitled to a refund of rent and other payments paid in advance, in respect of the period after the break date. In light of this decision, tenants should seek to include an express term to the contrary.
Tenants should seek legal advice when negotiating or exercising break notices, to ensure that the commercial objectives of the parties are met and that the right to break is not lost owing to a trivial breach of covenant.
For more information, please contact our business or commercial property teams: