InsightsInsight - Commercial Property - POSTED: June 27 2011
Breaking a Lease
In the current market, many small businesses are suffering – a lack of available credit on commercial terms, increasing regulation, foreign exchange pressures and a depressed market.
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This is prompting businesses to look at their property occupation needs and, where necessary, get rid of surplus property space. Where a business holds leasehold property, the terms of the lease will determine what is contractually available as an option. If you are about to enter a new lease, or take over an existing lease, then these same options should also be considered to ensure maximum flexibility.
Aside from negotiating a surrender with your landlord, or considering the effects of any insolvency, there are three main options available to a tenant when seeking to vacate its leasehold space:
- Transfer the Lease – known as “assignment” and usually found in the “alienation covenant”, a typical lease will allow a tenant to assign the whole of its interest to a third party.
- Underlet the Lease – again this is typically found in the “alienation covenant” and often allows the tenant to grant a lease (known as an underlease) of the whole and (in some cases) part of the property to a third party.
- Terminate the Lease – another option is the “break clause”. This is a clause which gives the landlord, the tenant and/or sometimes both parties, the right to terminate the lease early. An example would be the right to end a 6 year lease at the end of the 3rd year.
This article focuses on the final option – break clauses.
There are various types of break clause and the form in any particular lease will depend on the negotiating position of each party. A break clause can benefit one or both parties to a lease:
- The break right may just be for the tenant. The lease terms need to be checked as to whether this right will also benefit the tenant’s successors in title to the lease or whether the right is personal to a named entity.
- The break right may be for the landlord only. If the tenant has protected rights under the Landlord and Tenant Act 1954 (1954 Act), then in addition to exercising the break right under the lease, the landlord must also serve the relevant notices under the 1954 Act and the landlord’s ability to terminate the lease early will be subject to complying with one of the grounds in the 1954 Act.
- Occasionally the right to break will be mutual and thus exercisable by both the landlord and the tenant.
Triggering the Break Right A right to terminate a lease early will usually employ one of the following triggers:
- The right to terminate on a specified date.
- The right to terminate at any time on giving an agreed period of advance notice (known as a rolling break). The right to terminate at any time after a specified date.
Whilst a rolling break is most advantageous to the tenant, it is rare for a landlord to agree to this. More normal is the right to terminate on a specified date or dates after giving notice. You must remember that time is of the essence when exercising a break clause. Hence, serving a notice which expires one or more days before or after a specified break date will not be effective and you could find yourself stuck with the lease.
Pre-Conditions Break clauses normally require the tenant to give the landlord a minimum amount of notice before the termination becomes effective.
The period of notice (usually 3, 6 or 12 months) reflects the time the landlord needs to market the property and sign up another tenant. Break clauses often impose additional conditions on the tenant such as:
- To have complied with the repairing obligations in the lease.
- To have fully observed and performed the tenant’s covenants in the lease.
- To give up vacant possession
These conditions may be absolute or they may be qualified i.e. in the case of compliance with the tenant’s covenants, reference might be made to substantial compliance. Be careful though as break clauses are interpreted strictly and a tenant will be required to fully comply with any condition.
The tenant should try and resist any conditions and always push for an unconditional break clause as conditions have to be strictly performed and many hapless tenants have found that they were unable to successfully terminate their lease early.
Recognising the difficulties often faced by tenants, the Code for Leasing Business Premises in England & Wales published in March 2007 recommends 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).”
When seeking a break clause in a lease, remember to:
- Be realistic – don’t push for a rolling break right where there is no realistic chance of getting one.
- Be reasonable – don’t expect to be able to serve the notice one day and vacate the next. Agree to a reasonable notice period.
- Be careful – do not agree to any conditions that you can’t actually fulfil.
- Diarise the break – make sure you diarise the break right at least 2 months before the last date you can actually serve notice: don’t just set your reminder to 2 weeks before the actual break date.
- Have a back-up – make sure you have the ability to assign and underlet your lease.
When exercising a break clause, remember to:
- Check the lease – check what the break clause says and make sure any conditions are fully complied with.
- Check the notice provisions – check the clause in the lease which details how any notices have to be served, on whom and in what format
- Above all, get proper advice – when the time to break comes around, make sure you are properly advised and serve any notice in strict compliance with the terms of the lease. After all the risk of getting it wrong can be substantial.
Our Commercial Property team is well versed in negotiating, and advising on, break clauses and would be happy to assist where possible.
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