Break clauses in Commercial Leases – How to Avoid the Pitfalls

Break clauses allow either the landlord or the tenant, or both, to end the lease early. Whilst this can provide flexibility for the parties involved, exercising a break correctly doesn’t come without its challenges.

Here we look at some of the most important aspects for landlords and tenants to consider in respect of break clauses.

Landlords – top tips

Whilst landlords may not necessarily welcome the use of break clauses by tenants, in some cases, they can act as an important negotiation tool; helping to get deals over the line or filling empty premises in order to maintain income.

In some cases, landlords may wish to include break clauses to maintain flexibility on their part – especially if they are facing financial difficulty or considering a potential sell-off from their portfolio further down the line.

Landlords that seek to retain continuity of tenants should maintain a good relationship and try to establish what the tenant’s intention is in advance of the break date. This may present an opportunity to re-negotiate terms before the tenant serves notice to exercise the break.

Tenants – top tips

Following the pandemic, many businesses have had to re-evaluate the way they operate. For some, this may mean cutting back their businesses or looking to relocate their business to achieve better terms. In particular, for tenants in within volatile sectors such as the retail, including a break clause in a lease can allow for flexibility; providing an all-important ‘way out’ should circumstances change.

The break date and the notice period required should be diarised to provide plenty of time to review options, ideally 12 months before the notice period commences.

If tenants are in doubt as to the date break, or the lease is not clear, they should seek clarification from the landlord in writing.

Where a tenant opts to exercise a break, they will need to comply with the method and conditions required and then begin to make preparations to exit the property. Usually, alongside ensuring all rent payments are up to date, there are likely to be several conditions to meet, this could including providing vacant possession, compliance with covenants and occasionally payment of a break premium.

There are lots of break options available such as tenant or landlord only breaks / mutual breaks / inclusion of a break clause premium (where a fixed amount becomes due to the landlord if the tenant seeks to exercise the break) / rolling breaks rather than fixed dates. There are lots of things to consider when negotiating a break clause and early advice is recommended.

Katrina Fox is an Associate Solicitor in the Commercial Property Department at O’Donnell Solicitors. For more information or advice in relation to break clauses, please contact Katrina Fox or James O’Donnell at our head office on 01457 761 320 or email katrina@odonnellsolicitors.co.uk or james@odonnellsolicitors.co.uk.