Break Clauses in Commercial Leases
26th Feb 2009
Ursula Collie, gives advice to tenants looking to downsize in the current climate.
In the present downturn the question whether a tenant can bring its business tenancy to an end early by operating a break clause in the Lease has assumed a crucial importance. Many tenants are downscaling their business and want to reduce the area that they let or get out of the Lease entirely, while Landlords want to keep the tenant on the hook for as long as possible since there can be no guarantee of finding a new tenant. To have a property standing empty and tenantless is the Landlord’s nightmare especially now that in many cases business rates are payable on such premises.
If the Lease allows the Tenant to terminate the Lease early, this is usually on specific terms involving written notice given in a particular way and possibly the payment of a sum of money. These clauses are interpreted precisely by the Courts. There is no general rule - it depends on the individual Lease. The service of break clause notices can be a pitfall for the unwary.
It is important to check how the notice is supposed to be served. If the clause says that the notice has to be served by recorded delivery (now special delivery), it may not be sufficient to hand the notice to the Landlord personally (even if you know he has actually received it). It all depends on the wording – if the Lease says recorded delivery “must” be used then there is no option to use any other method, but if the Lease says that recorded delivery “shall” be used, then other methods may be permissible so long as the Landlord does receive the notice in time.
Conditions on the exercise of the break clause also have to be observed very strictly. If a sum of money has to be paid, it must be paid by the date stated and not a few days later – otherwise the exercise of the break clause will be invalid.
Most break clauses are on condition that the terms of the Lease have been fully complied with. This can be a good excuse for Landlords to make tenants get their house in order. Before the downturn it was established that Landlords could not use these provisions in an excessively nitpicking way to deny the Tenant the break clause purely on minor grounds. Watch out for these arguments re-surfacing now that the squeeze is being felt by Landlords and Tenants alike.
Author: Ursula Collie (info@bhplaw.co.uk)
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