A break clause is a contractual provision in a commercial lease which allows either the landlord or the tenant to terminate early. Break clauses are often one of the most important negotiation issues in the grant of a new commercial lease.
If you need advice on a commercial lease, whether as Landlord or tenant, at the stage of drafting or where as tenant you are planning to exercise the break clause in your lease, we can help.
The right to break may arise on one or more specified dates, or, less commonly, may be exercisable at any time during the term on a rolling basis, most commonly after a certain date. The process usually involves the service of a formal break notice on the other party, notifying them of the intended break date in the form and on the date/s prescribed by the lease.
A break clause may also include mandatory notice provisions on the service of the break notice. In the absence of such provisions, the general notice provisions in the lease will usually apply.
If a break is successfully operated, the lease comes to a end, as do all future obligations. However, whilst most breaks in favour of the tenant have conditions attached requiring full compliance with the lease terms in order to be successful, if the terms of the break do allow the tenant break whilst in breach, the break does not waive the liability for any breaches and the landlord can still pursue these. End of lease dilapidations (repair and condition on hand back) will apply in most cases in any event.
From a tenant’s point of view, a break clause offers flexibility; depending on how the lease is drafted the tenant has flexibility to decide on whether to terminate the lease early based on its current needs, business performance and market conditions.
Whether a tenant can realistically and successfully try negotiate a break clause depends on many factors, such as the attractiveness of the premises and general bargaining position. Where Landlords do agree, they will generally seek other concessions from the tenant.
Break clauses are often timed to coincide with rent reviews.
If a break clause is agreed there are some risks and potential pitfalls for tenants that should not be overlooked (see below).
At the other end of the spectrum, whilst a landlord will want to ensure a rental income for the duration of the lease term, a break clause might also suit a landlord where they might want to redevelop the property before the end of the lease term.
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With over 20 years in real estate, David is a highly experienced conveyancer who routinely deals with complex property transactions.