Top Tips For Landlords & Tenants - Exercising A Tenant's Break Clause
When negotiating a commercial lease (especially one of any significant length) it is quite common that the tenant will want an option to break the lease. These options will quite often be at agreed periods during the contractual term of the lease and provide comfort to an incoming Tenant who will know that if things go wrong or plans change, they can end the lease and hand back the keys.
However, break clauses provide uncertainty for a landlord. Will they have a Tenant in the property for 15 years or 5 years? They will not like the idea of the tenant being able to end the lease early without some sort of control. Therefore the exercising of the break will usually be dependent on the tenant complying with certain requirements and this is where things can become tricky. Some of the usual requirements are as follows:
Notice – It is imperative that a break notice is served correctly, otherwise it may be invalid. Often, by the time the issue has been spotted, it is too late to re-serve it. The tenant will then be tied into the lease until the next break date or the end of the lease, which could amount to a very costly mistake. Therefore the provisions of the lease need to be analysed to ascertain on who, where and by when the notice needs to be served.
Breach – A landlord will often try and ensure that the tenant cannot break the lease if there are any breaches of the lease at all. It is important a tenant resists this clause as the breach could be trivial (for instance the tenant may not have cleaned the windows quite as often as required by the lease that month) and this could stop the exercising of the break. Sometimes the breach will be qualified as “material” but a tenant should try and remove this requirement in its entirety.
Vacant Possession – A landlord will require vacant possession being given on exercise of the break. This sounds like a fairly easily requirement to comply with but can actually be a lot more onerous than it first sounds. For example, something as minor as leaving a bag of rubbish at the property could be in breach of this and prevent the break. A common compromise is that the tenant moves out and ensures there are no sub-leases in place at the property on the break.
The above are a few of the most common issues when exercising a tenant’s break clause, but there are many others which can arise. It is important break clauses are negotiated and drafted appropriately as well as being exercised correctly. It can be very costly if it goes wrong, given the additional years of rent, rates and other payments due in a commercial lease. Tilly Bailey & Irvine Law Firm’s Commercial Property Team can assist with all aspects of break clauses in commercial leases for both a landlord and a tenant.