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A break clause is a get-out for a tenant to end a lease term early. In a modern 5-year lease, it is quite common to find a break after two or three years, allowing a tenant to exit a property and move on. As with many aspects of a lease, things are not always as simple as the tenant would hope. Below we consider break clauses, their types, requirements and potential pitfalls.
Break clauses can typically fall into three categories:
An unconditional break clause will be akin to…
‘The tenant may break the Lease on the second anniversary of the Term providing that six months’ notice is given in writing and without any prejudice against any other claim for breaches of the Lease’.
This is beneficial as it means a Lease can end and its operation is fairly straightforward, all that has to be done is to give notice.
The wording will be similar to as above however, it will no doubt add in…
‘the tenant may break, providing the Lease provisions are substantially performed’
Before the Lease ends the tenant must ensure the demised property is in a condition substantially commensurate with the lease terms.
If complied with the Lease will end. With this form, there is an ambiguity as to what ‘substantially’ may equate to. There is a good deal of commentary on what constitutes substantial and numerous legal cases.
An absolute break clause is conditional, it is simply ramped up to be very difficult to exercise. This type of break is falling out of fashion, however, occasionally they is still found.
The pre-condition of the lease successfully breaking is that all tenant’s lease clause requirements should be fully complied with, without exception. This sets a very high standard, a seemingly trivial omission can result in the lease not finishing and a tenant being tied into the lease until the next break or the lease term ends.
There is often a limited understanding, naturally, of a tenant on a technical subject. When the technicalities are critical then problems occurring are foreseeable.
Many years ago, one of our surveyors acted for a landlord, putting together a dilapidations claim on a warehouse in Blackpool. The tenant was exercising the break option.
When notice of the intention to break was given schedule of dilapidations was completed The tenant did little in the way of complying and much of the time was spent with negotiations between the tenant’s and landlord’s surveyor.
The day of the break arrived and the landlord, with advice, confirmed the opinion that the conditions of the lease break had not been complied with. Little of the work identified in the schedule of dilapidations had been completed.
The stakes were high as there were three more years to run on the lease, at more than £100,000 rent per year. Matters progressed towards litigation and mediation was sought.
In a little under four hours of mediation, the matter had been settled. The tenant had successfully exercised the break. But, to get the break, they had to pay the landlord around £200,000 cash.
The break was a failure for the tenant, the only benefit was that eventually the lease had ended, but the business lost a significant sum of cash.
In a recent break clause, Dabinett was instructed to advise upon a Schedule of Dilapidations served on a tenant. It became apparent this had been precipitated by the tenant serving a break notice and there were now just two months left of the six-month notice period.
The break clause was strict in requiring full compliance, so decorations, repairs & reinstatement, etc were required.
Advice was given that the chance of completing the works was slight, the best chance the tenant had was to negotiate a cash settlement.
At the same time as negotiating, Dabinett prepared a schedule of works, tendered the works and reported.
What made the work all the more difficult was the fact that the particular demise was part of a 19th-century manor house, with 20ft high painted and gilded ceilings. The prospect of needing to consider repair or any decorative treatment was onerous
With a little over one week left of the lease, a cash settlement was reached, and the tenant could breathe once again.
Demonstrating that not all break clauses are more than just dilapidations, was a case of an office in Douglas on the Isle of Man. The lease was on a large office occupied by an insurance company.
With approximately 24 hours left until the break date ticked over the tenant’s surveyor was calmly confident everything in their power was on track. Things were going awry elsewhere though, the tenants’ accounts department had decided to pro-rata the final quarterly Lease payment to reflect the actual time that they would be in the building. The Lease required the full quarterly payment to be made and only subsequently would the landlord reimburse the tenant for any overpayment.
A panic to make sure the missing funds would arrive on time ensued. With just hours to spare this was achieved and the lease ended.
The first thing to do with the break clause is to understand that there is one and how it works. As a tenant, the clause needs to be as simple as possible with no pre-conditions.
In the event the lease is midterm, then getting advice before exercising the break clause (i.e. giving notice) should be considered urgently.
In the best cases, if a tenant knows they have a six-month notice period then they will be planning 12 months at least. They will have everything put in place to understand what the liabilities are, so they are well aware of how much it is likely to cost them to comply.
In many instances being open with the landlord and accepting that there are works to be carried out can see a settlement reached, negating a huge amount of stress on the part of the tenant.
The role of the Landlord can be significant in the success of a lease break.
In some scenarios, a landlord will do everything to block the Lease ending. A landlord typically wants to see their building occupied and receiving rent. There is a natural aversion to having an empty building which may be difficult to relet and may have a business rates overhead.
In other instances, there may be a pragmatic view that if a tenant wants to exit it is better to do this on good terms and make the best of the situation. Making the best of the situation though does usually require goodwill on both sides. Goodwill is risky to rely upon.
Keeping the Landlord involved at all times has a significant benefit that should matters proceed to court, those discussions held with the landlord may be invaluable to demonstrate what the landlord was willing to accept and how negotiations went.
The idea is for a tenant to have the flexibility of a break clause and for that break clause to be easily operated. However, the break clause is often drafted to set up an advantage to one party and there is the scope for commercial gain to be attempted.
Early advice from surveyors and solicitors should be sought and the sooner then all the better.
If there is a lease coming to an end either through the natural expiry of the term or curtailed by a break clause, then Dabinett can provide expert advice to save time and expense.
If you need any advice regarding lease terms and implications, please do not hesitate to contact us.
