Commercial lease break clause

Commercial lease expert Oliver Thorp considers common traps for tenants wishing to exercise a commercial lease break clause.

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What is a commercial lease break clause?

A commercial lease break clause allows the tenant (and sometimes the landlord) to end the lease early. These clauses are often seen as a means to limit long term liability – effectively a ‘get out of jail free’ card. But in reality, the break clause may not be worth the paper it’s written on.

Below, I have set out some common traps for tenants. These underline the importance of tenants in particular of taking timely legal advice.

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Notice period

The lease will inevitably require the tenant to give a stated period of notice in writing before the break date. Giving notice just one day late is fatal to exercising the break. So, not only should the tenant be thinking about the ticking clock, but they should also factor in an adequate safety margin to allow for any difficulties they encounter in serving the notice.

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Serving the notice

Leases inevitably state the procedure for serving notices. Follow this procedure precisely! Serving the correct landlord at the correct address may sound straightforward, but it’s surprising just how often tenants get it wrong. Never simply assume you know your landlord’s identity or service address – check the lease carefully.

Registration delays at the Land Registry also catch out tenants where the landlord has recently changed. In such cases, always serve notice on both the new and old landlord (who technically remains the legal owner pending registration).

Preconditions

In addition to providing timely written notice, there are usually other preconditions to exercising the break. Again, follow these precisely. Typically, such preconditions include:

payment of rent; and
returning the property free of third party rights or occupation.

‘Vacant possession’ is often very difficult to achieve, as is ‘compliance with the tenant’s lease covenants’, as there will nearly always be some technical breaches.

Payment of rent

Tenants should pay particular attention to the precondition of paying rent. How is ‘rent’ defined? Does the lease refer just to the annual rent, or does ‘rent’ include other items such as service charges and insurance?

A problem for tenants is that such additional charges are often unknown when exercising the break or even by the break date. So, how can they pay what is unknown? But not paying is fatal to exercising the break.

In addition, the tenant must pay ‘all the rent due’, and it’s crucial to remember that this may include rent beyond the break date. For example, the tenant must pay the full quarter’s rent if the break date falls a few days after a quarterly rent payment date. Paying a pro rata sum up to the break date is not paying ‘all the rent due’, and the break will not have been exercised.

From the tenant’s perspective, a well-drafted break clause will provide for returning overpayments beyond the break date.

Rent reviews

Typically, break dates are tied in with rent reviews. So, for example, a ten year lease may provide for both a rent review and a tenant break after five years. There are a couple of crucial points in this respect.

First, the tenant must ensure that the break date is not on the same day as the rent review, but instead, the day before. Not doing so leaves the possibility of the landlord arguing that the rent due remains unpaid because the new rent remains unknown.

Second, a major reason for tying together the tenant break and rent review is to allow the tenant an opportunity to ‘abandon ship’ if market rents rise beyond their means. So, it’s important for a tenant to begin discussions with the landlord well before they need to consider exercising the break, in order to give them a good idea of what the new rent is likely to be.