Break Clauses in Leases - Important considerations?

In leases, break clauses serve as crucial provisions that provide commercial flexibility for both landlords and tenants. These clauses can allow either party to terminate the lease before the expiration of the fixed term, subject to certain conditions being met and any contractual notice requirements being followed.

Break clauses can have far-reaching implications that both parties should carefully consider. This article aims to shed light on the key aspects of break clauses in leases, outlining their effects, considerations for landlords and tenants, and the importance of seeking legal advice when exercising them.

What is a break clause?

A break clause is a contractual provision that grants one or both parties the right to terminate a lease prematurely. It acts as an escape route, allowing parties to exit a lease early, providing flexibility in an ever-changing business environment. The points for each party to consider differ slightly in detail and are outlined below. 

Types of Break Clause

• Landlord only
• Tenant only
• Either Landlord or Tenant (or “mutual”)
• One off/Rolling break
• Available in, or triggered by, certain eventualities, such as redevelopment
• Conditional break
• Personal break right, or available to successors/assignees

Lease Code 2020

Break clauses are typically made subject to specific conditions, which will generally apply either at the time of serving the break notice or on the break date itself (and often, both). The Code for Leasing Business Premises (known as the “Lease Code”) published by RICS specifies that, unless the parties have agreed stricter conditions in the heads of terms, a Tenant’s break should be conditional only on (i) the Tenant paying all basic rent payable before the break date, and (ii) giving up occupation and leaving no subtenants or other occupiers. However, the Lease Code is a statement of best practice and is not legally enforceable, so care should always be taken when negotiating and drafting any lease break options and associated conditions.

The Lease Code also requires Landlords to repay any rent, service charge or insurance paid by the Tenant for any period after the break takes effect – but, again, there is no legal entitlement to this if it is not specifically included in the lease.

Points for Landlords to Consider

For landlords, it is vital to draft break clauses carefully to ensure their interests, and the value of their asset, are protected. Ambiguous or poorly worded clauses can – and all too often do – lead to disputes and costly litigation. Seeking legal advice when drafting a break clause can help landlords avoid potential pitfalls.

Particular issues arise where break notices are unclear as to the exact method by which the notice must be delivered. In the case of Blunden v Frogmore Investments, a landlord’s break was narrowly found to be valid even though it had been returned as undelivered – but the Court of Appeal decision was nonetheless extremely costly for the landlord to obtain.

Development

A landlord break option will commonly be exercisable if and when the landlord wishes to redevelop the property. In such cases, the break notice will form part of a wider timeline involving planning, funding, and the appointment of a professional team. Ensuring the validity of a development break is therefore critical to the success and deliverability of the wider project, and specialist legal advice should be sought at the earliest possible opportunity.

Points for Tenants to Consider

Tenants must thoroughly review the conditions associated with the break clause. These conditions may include obligations such as reinstatement of alterations, payment of outstanding sums, a “break premium”, or compliance with repairing obligations. Failure to fulfil these conditions can lead to the break clause being invalidated, potentially leaving the tenant liable for rent and other costs for the remainder of the lease term.

In Bairstow Eves (Securities) Ltd v Ripley, the break option required the tenant to have complied with its lease covenants, one of which was to paint the property in the final year of the term. The property had already been painted just before the final year, and the court accepted that painting it again would have made no difference at all to the condition or presentation of the property. Despite this, the tenant’s break was rendered invalid as it had not complied in full with its lease covenants.

Notice Periods

Break clauses usually require the serving of a notice by the party wishing to terminate the lease. Although both landlords and tenants will need to be mindful of the requirement to give adequate notice, tenants are particularly at risk – particularly in instances of “one-off” breaks. Notice periods can vary widely, but it is critical to specify the length of notice required by the lease agreement. A break option requiring “not less than six months’ notice” will still be valid if the notice is sent seven months before the break date, but a notice requiring “six months’ notice” will need to be timed so as to be delivered precisely six months prior to the break date. Clearly, the former option allows for far greater certainty and less room for error.

Seeking Legal Advice

Exercising a break clause can have significant – and expensive – implications for both landlords and tenants. Due to the complexity and potential risks involved, it is strongly recommended that clients seek professional legal advice before taking any action. An experienced solicitor with expertise in property law can review the lease, clarify obligations, and guide clients through the process, ensuring compliance with legal requirements and safeguarding the client’s interests.  It is advisable to seek advice early as otherwise there may not be sufficient time to ensure compliance with all necessary conditions before the break date.

If you would like more information on Break Clauses or wish to find out more about this topic please contact our new enquiry team today on 01634 728111 or you can email us at enquiries@martintolhurst.co.uk and we can arrange for one of our experts to get in touch with you to discuss any questions you may have.