Break clauses – frequently seen in commercial leases – are contractual provisions that typically provide the landlord or tenant (or, in some circumstances, both) with the ability to terminate a lease ahead of the expiry of the contractual term. Break clauses set out a pre-defined mechanism by which a lease can be terminated.
Break clauses and the conditions they are subject to can often be one of the most negotiated provisions within a commercial lease and their exercise can often lead to disputes and even litigation.
Who can exercise the break?
Landlord only and/or tenant only break
A lease may be drafted so that only one party has the right to break the lease. This will depend on covenant strength of the parties during the negotiation process.
Mutual break
This is where the terms of a lease agreed allow both the landlord and tenant to break the lease on the same terms. For drafting purposes, this is usually dealt with in the same clause within a lease. For example, the lease would state: “Either the Landlord or Tenant may terminate this lease…” However, it is possible for a lease to permit the landlord and tenant to break the lease at differing points within the term with differing conditions attached. In this way, a lease would be drafted to have two separate break clauses — one for the landlord and the other for the tenant.
Types of break clauses
One-off break
A right to break can occur on one or more specified dates. In this scenario, the break date(s) need to be clearly defined in the lease (most commonly within the defined terms of said lease). If the tenant has the right to break the lease on a specified date, they will usually be required to serve the landlord with a break notice either three or six months prior to the specified break date (depending on the terms agreed). It is important to use “not less than” wording to avoid complicated numerical puzzles that can occur if “on [X] days’ notice” wording is used. It may be drafted as follows: “The Tenant may terminate this lease by serving a Break Notice on the Landlord no less than three months prior to the Break Date.” However, once the specified date(s) have passed, the right to break will cease to exist.
Rolling break
This is where a right to break can be exercised at any time during the term of the lease. This can commence after a specified date has elapsed (for example, the first anniversary of the term). A break clause of this nature is commonly drafted as follows: “The Tenant may terminate this lease by serving a Break Notice on the Landlord at any time on or after [date].” In the event that a party tries to exercise their break right and is unsuccessful, the right to break will continue and the party can try again.
Prep and service of a break notice
Break notices are strictly construed against the party exercising them so accuracy is critical.
Form of notice
A commercial lease may contain a prescribed break notice precedent referred to and annexed to the completed agreement. Provided that the prescribed form is not amended, this method reduces the risk of an invalid notice. A more usual method is to draft the required break notice in accordance with the break clause and the lease itself. This method has much room for error. Any error — however technical or minor — is likely to constitute a failure to comply with the conditions of the notice and render the notice invalid.
Service of notice
The lease will set out the procedure by which the relevant party should serve a valid break notice. To avoid any challenges to validity, the notice must be served in the correct format and within the specified timeframe.
Method of service is crucial. Service of a break notice is typically by recorded delivery or registered post to the last known address for service but could also be required to be by hand delivery or email to specific addresses. The ability to obtain a receipt of service provides comfort to the party serving the break notice that it has in fact been received by the other. Method of service should always be compliant with the lease and must be checked on a case-by-case basis.
It is critical to ensure that the break notice is served on the relevant party at the correct address and by the correct method. Any notices served addressed to the wrong party, at the wrong address, or via a method not accounted for in the lease, would likely render the break notice invalid.
Break conditions
Conditions attached to the right to break (usually a tenant break) must be carefully considered prior to serving a break notice. To do this, legal advice should be sought to fully determine what is required under the terms of the lease.
Common conditions attached to a tenant break are as follows:
- Any sums that the tenant may be liable for (rent, insurance rent, service charge, interest and any other costs where applicable) are paid and up to date. All sums due under the lease must be accounted for to assess what is deemed to be full payment, including the full quarter’s rent where rent is paid in advance — even where the break date is mid-quarter. The tenant will not normally be entitled to a refund of rent paid in advance unless there is an express provision in the lease to the contrary that apportions sums for the period up to the break date. In any event, all payments must be made in cleared funds prior to service of the break notice unless the landlord expressly agrees otherwise.
- Vacant possession. This condition requires the tenant to vacate the property and return it to the landlord in the condition required by the lease prior to service of the break notice. This includes ensuring that any fixtures and fittings are replaced and that the property is free of any existing underleases, third-party rights and/or charges.
- No subsisting (and sometimes material) breach of any tenant covenants, usually relating to the state of repair and condition of the property. An unfortunate tenant may be subject to repair and/or reinstatement obligations that must be met before the lease can be terminated. This can be almost impossible to satisfy and legal and surveying advice should be obtained in plenty of time.
This is just a brief summary, but there is substantial case law on all these conditions and how easily tenants can get them wrong.
Considerations to security of tenure
It is essential that the Landlord and Tenant 1954 Act is considered when granting a lease that contains a right for the landlord to break. Because a landlord would have to follow the 1954 Act procedure to end the lease, a break option in a secure lease is of limited value. It is more usual that, where the landlord has the right to break, sections 24 to 28 of the 1954 Act are excluded (with the formal statutory procedure being accurately followed) to ensure that the tenant does not acquire security of tenure.
Importance of accurate drafting
Accurate drafting of a break option is crucial to ensure that the agreed terms are correctly incorporated into the agreed form lease. It is extremely important to account for the parties’ expectations so that, in the eventuality a break right needs to be exercised, it can be — and on the conditions (if any) known.
As basic guidance, the following information should be accounted for:
- Expressly stating the party and/or parties (to the lease) who have the right to exercise the relevant break;
- Detailing any break date(s) or break from date(s) if specific;
- Specifying the minimum time period in which the break notice should be served; and
- Any conditions that are to be attached to the right to break (to be satisfied prior to service of the break notice).
Furthermore, poor drafting of the break notice itself may result in an ineffective break notice, which would in turn result in an ineffective break. This would have substantial consequences for either the landlord or tenant. In the case of the landlord, they may have needed to obtain vacant possession for a sale or redevelopment purposes.
A tenant would remain liable under the lease for not only financial liabilities (such as rents, service charges and business rates) but also the covenants given.
Next time Rent review provisions, including a summary of variable rents, a review of base rent in turnover-rent leases and a summary of recent case law
Joshua Hughes is a trainee solicitor at Brabners
