The lockdowns and work from home rules have ensured another shift in the commercial property landscape, with many organisations now questioning their former standard working practices.
This reassessment of the space needed in leased offices or retail units, places far greater importance on break clauses in commercial property leases. Ensuring they do what they are designed to do, for both tenant and landlord, can help avoid conflicts that can be messy and expensive.
Break clauses, which allow a party to terminate the lease before the end of the lease term, are typically required because the majority of commercial leases are agreed for anywhere between five and ten years, sometimes longer. As evidenced by the last two years, a lot can change in this period and break clauses enable the landlord, the tenant or both to end the lease early, providing conditions agreed at the start, are met.
When signing a 10-year lease, it might make sense to try to agree a clause that allows the tenant to leave any time after five years, as long as the agreed notice period is given. Some clauses will allow either side to exit the lease and trigger dates can be agreed in advance or roll forward annually.
The reasons for a break clause
Break clauses provide greater flexibility for both landlord and tenant. If the tenant’s business goes well, they may need larger premises and agree a new lease with the same landlord for a different property.
For the landlord, the break clause allows them to regain occupation of their property for development purposes or monitor tenants and if they feel they can now attract better tenants, able to pay higher rent, they can terminate the lease.
Tenants are more likely to sign longer leases if they have the safety net of a break clause that allows them to exit early should their circum- stances change – for better or worse.
It can be off-putting for a tenant to recognise that the landlord can break the lease and demand the return of their premises, but this is one consequence of the greater flexibility demanded by tenants in the post-COVID commercial property environment – there’s going to be more give and take.
When either the landlord or tenant seeks to trigger a break clause, it can be a tough exercise and it can easily go wrong. But, in fact, the hard work starts when drawing up the lease and drafting the break clause, when experience is required to ensure it achieves what is expected.
Problems can arise when either party believes the other has not entirely met the terms of the break clause and typically involves a landlord asserting that the tenant hasn’t done all they should have to break free from the lease.
In the current climate, there is an expectation that an increasing number of tenants could seek to trigger an existing break clause, potentially to downsize and agree a new lease, even in the same space.
Seeking to trigger a break clause is a serious step, requiring a lot of advance planning and should really involve the advice of an experienced commercial property lawyer, who will help avoid the unwanted consequences of getting it wrong.
In what can be a poor rental market, with lots of tenants looking to downsize, landlords can be put on the back foot, having to find tenants quickly to maintain their income. This situation will ensure landlords will check the details of their agreements closely, to understand if they can reject the request to break the lease.
Ensure you serve notice correctly and adhere to its conditions
When considering a break clause, the first important point is, how, when, where and to whom the notice requesting the break should be served. The details of these instructions in the lease must be followed to the letter, or a break clause will be rendered invalid if the conditions are not met.
The notice might have to be given using a specific form and must be delivered to the right person. Check the landlord at the time the lease was drawn up, is still the landlord and check with the Land Registry if necessary. The party exercising the break clause must adhere to the provisions of the clause and prove the notice was served correctly. Case law has shown time and again that break clauses will be construed against the party seeking to rely on it.
The party serving the break will often have to demonstrate they provided ‘vacant possession’. This is not as easy as it sounds and can take time to resolve, as it is not just a case of leaving the space empty, but as it was when the lease was agreed, with any changes reversed and everything left as it was, including all the original fittings.
It’s important to note that once a break clause is triggered, it can- not legally be revoked, even if either party changes their mind due to circumstance changing while the notice period is being served. A new lease at the end of the old is the only solution which often have a number of unwanted consequences for either landlord or tenant or both.
Standard commercial leases are a thing of the past and new leases will contain clauses designed to protect the interests of the landlord and tenant, so it is always advisable to remain aware of current trends and engage appropriate legal advice before discussing any contractual changes.
Lease agreements in general and break clauses in particular offer a lot of potential risks for the unwary and this is where the help of an experienced commercial property lawyer can save a lot of time, stress and expense.
If you need support drafting leases with appropriate break clauses or need advice about triggering a break clause, speak to a member of the Commercial Property team at Taylor Walton Solicitors on 01727 845245 or email firstname.lastname@example.org