Should I negotiate a break clause within my commercial lease?

What is a break clause?

Specialist commercial property solicitor at Holmes & Hills, Laura Gale, discusses break clauses and what to consider if you are thinking about negotiating one as part of your commercial lease.

A break clause is a clause that can be included in commercial property leases, to enable one or both of the parties to terminate the lease early, e.g. before expiry of the contractual term of the lease. The right to break may arise on one or more specified dates (i.e. the “Break Dates”) or may be exercisable at any time during the term, on a rolling basis.

Do I need a break clause?

Whether you are landlord or a tenant, your requirements for a commercial lease will largely depend upon your personal circumstances/circumstances surrounding your business. When deciding whether a break clause is required, your main consideration will ordinarily be “is it likely I may need to terminate this lease early?”. This may depend upon a number of factors, such as:

• Financial forecasting for your business;
• How strong the landlord and tenant relationship is;
• For tenants, how likely it is that your business will succeed to allow you to continue paying the rents (and other sums) due under the lease;
• For tenants, how likely it is that your business will expand, meaning you outgrow the demised premises;
• For tenants, how likely it is that you will enter into the lease, and then discover the property or lease itself is not suitable for your business needs;
• For landlords, how likely it is that you will want to sell your freehold reversion with vacant possession;
• For landlords, how likely it is that you will want to take back possession of the premises, for yourself, or to grant another lease to a different tenant.

I am party to an ongoing commercial lease; can I still have a break clause?

If your lease has already completed and you do not have a break clause but wish to introduce one, you will need the consent of the other party to the lease in order to vary the lease to include a break clause. The other party will be under no obligation to agree to the inclusion of a break clause, but it may be that they deem introducing a break clause fits with their commercial interests also. In this situation, the advice of a specialist commercial property solicitor will be required in order to ensure appropriate drafting of such a clause. It is recommended that legal advice is sought prior to approaching the landlord or superior landlord  and negotiating the clause.

Factors to consider regarding break clauses in commercial leases

Who should benefit from the right to break?

The first thing you may wish to consider is whether the right to break will be available to both parties of the lease, or whether only one party will reserve the right to break (e.g. via a “mutual break option”). Some tenants may require a tenant-only break, to avoid the landlord being able to terminate the lease early, potentially jeopardising their business. Other tenants may be happy to accept a mutual break.

Mutual breaks are used less frequently in “protected leases”, i.e. business leases benefitting from security of tenure, pursuant to Part II of the Landlord and Tenant Act 1954 (“LTA 1954”). This is because the aim of a protected lease is to give the tenant a statutory and automatic right to a renewal lease on expiry of the contractual term of the current lease. To some extent, a mutual break allowing the landlord to terminate early contradicts the objective of having a protected lease. However, if the parties are in agreement, this does not preclude the protected lease from benefitting from a mutual break clause.

If the lease has been contracted out of part II of the LTA 1954, then a landlord’s break notice (if valid) will be sufficient to bring the lease to an end. Whereas, if the lease is a protected lease, the landlord will additionally need to serve the tenant with a section 25 notice to successfully bring the tenancy to an end.

Lastly, when considering a break clause, the parties should consider whether the right to break should be personal to the original parties entering into the clause, or whether the right to break should pass to any assignees on an assignment of the lease.

The Break Date(s):

The parties should next consider when the Break Date(s) shall be, or whether the break option will be on a rolling basis. If the lease is being granted for a particularly long term, more than one Break Date may be required. When the parties want ultimate flexibility, a rolling break may be more beneficial. Alternatively, the parties may agree that the break will be exercisable at any time after a specified date.

Penalties:

The parties may wish to discuss whether the right to break will be subject to any penalties, i.e. will one party pay a lump sum to the other in order to benefit from a right to break?

Conditions:

The break clause will need to specify whether the right to break is subject to fulfilment of any conditions, such as:

• The landlord must have a genuine intention to redevelop the property;
• The party exercising the break must pay a penalty (as above);
• The tenant must have performed all of its covenants under the lease;
• The tenant must give the property up with vacant possession/free from all third-party rights of occupation;
• The tenant must not be in material breach of its repairing covenants.

The clause should stipulate whether any conditions need to be satisfied at the date of service of the break notice, at the relevant break date, or both.

Underleases:

It should be noted that if a headlease is terminated pursuant to a break clause (no matter which party exercises the break), any underleases shall also end. If the term of an underlease was due to last beyond the break date in question, the undertenant may have a claim against the tenant. Care should therefore be taken when granting any lawful underleases that they contain landlord’s rights. We would recommend that you take legal advice before entering into any underleases, to ensure compliance with the headlease and to sufficiently protect your interests.

If you are a commercial landlord or tenant considering offering/taking a new commercial lease and would like to negotiate a break clause, or you have an existing lease and are thinking of attempting to negotiate a variation of the lease to provide for the inclusion of a new break clause, you should seek expert legal advice form a commercial property law specialist.