Exercising a break clause

Top tips for commercial tenants exercising a break clause

If you are a business tenant, a break clause in your commercial lease gives you valuable flexibility to move out if circumstances change, but the law on break clauses is full of traps for tenants.  If you want to be certain of ending your lease successfully, you must pay attention to all the details and follow the process required by the lease to the letter. Missing a key date, sending your notice to the wrong person, leaving things in the property or not paying everything you owe can all spell disaster, so it is crucial to get your solicitor involved well in advance.

‘If a commercial tenant serves a break notice, it means they really need to bring their liabilities under the lease to an end,’ says Kimat Singh, head of commercial property team with Kerseys Solicitors. ‘The last thing they want is to find that they are still on the hook because of a technical mistake in the way they served the notice or left the premises.’

Tenants cannot rely on the courts to sort out inadvertent mistakes, so it is important to get it right first time.

When to serve the notice

You will need to know both when the break can be exercised and how much notice you must give.  The lease may set out a single break date, either expressly (for example, 25 March 2028) or by reference to the date the term began (for example, ‘on the fifth anniversary of the term commencement date’).  The second version can be confusing, and you must be careful that you have identified the right date.  Your solicitor will be able to help you.

Some leases allow the tenant more than one chance to exercise a break.  Examples could be:

• ‘on 25 March 2028 and every anniversary of that date for the remainder of the term’; or
• ‘at any time on or after 25 March 2028’.

Once you have worked out the break date, you must get the notice period right.  Most modern leases allow some flexibility by requiring notice of ‘no less than’ a stated period, typically six months, but beware of drafting that requires a specific notice period to expire on the break date, as missing that date could mean you lose your right to break.

How to serve the notice

There are some things you must get right:

• Must the notice be in a specific format? There may be a template referred to in the lease.
• To whom should the notice be sent? This will usually be the landlord, and their address for service should be set out in the lease but your solicitor will check to see whether it must be sent to, for example, a landlord’s agent as well, or instead. The point is that you must do exactly what the lease says.  Things can go wrong if the landlord is part of a group of companies and you accidentally serve your break notice on the wrong one, or get the name wrong in the notice.  Your solicitor may suggest serving multiple notices to be certain.
• Does the lease say whether the notice must be sent by post or hand delivered? You should avoid serving notice by email, unless the lease says clearly that email service is allowed because the law on this point is still uncertain.

The courts have sometimes ‘rescued’ notices where there were mistakes in the way they were addressed or served, if it was clear that no one would have been misled.  Tenants should not rely on this as a safety net, not least because there will be significant legal costs.  Getting an expert solicitor to make sure you serve your notice correctly is essential.

Conditions for the break

Having served your break notice successfully, you must also make sure you satisfy any break conditions set out in the lease.  These can vary depending on the circumstances, but they typically cover payment of everything that is due; breaches of the lease; and the way you must leave the premises.

Exercising a break brings future obligations to an end but you will still be liable for any existing breaches and the landlord could still enforce them.  In practice though, landlords prefer to make sure any breaches are dealt with as a condition to allowing a tenant to break the lease.

Paying everything that is due

You must make sure you have paid everything that has fallen due up to the break date.  This includes any arrears, as well as the rent, insurance rent, service charge and any other costs for which you are liable.  There is a potential trap in relation to rent.  Most leases require rent to be paid quarterly in advance, on a quarter day.  If your break date falls part way through a quarter, you must still pay the full quarterly instalment, unless the lease says you can adjust the last payment.  For example, if your break is on 30 October, your last rent payment date will be 29 September.  It would be tempting to pay only the rent to cover the 32 days from 29 September to the break date, but you must pay the full quarter’s rent up to 25 December.  You may be able to claim a refund of rent for the remaining part of the quarter if the lease provides for this, but if it is silent then you have no right to get any rent back.

Complying with lease obligations

The break will probably be conditional on you having complied with your obligations in the lease.  Most break clauses do not insist on strict compliance with every covenant and say instead that there must be no ‘material’ breaches.  This broadly means that there are no breaches that would require the landlord to spend significant time or money putting the premises into a state in which they can be re-let, but your solicitor can advise you about your particular property and what your lease requires.

Leaving the property

The final requirement is that you leave the property in a state in which the landlord can easily re-let it.  Older leases may require you to give ‘vacant possession’ but this is often now replaced with a requirement that you give up occupation and do not leave anyone else occupying (such as a sub-tenant or someone sharing informally).  The key things to remember are that you must remove all of your belongings (including rubbish) from the property and hand back the keys.  You may need to remove alterations, such as internal partitioning and should definitely not leave anyone working in the premises after the break date, even if they are finishing off repairs.  Again, ask your solicitor for advice on what you should do in your particular situation.

How we can help?

Exercising a break clause successfully requires forward planning and attention to detail.  Our expert team will help you work out exactly what you must do and make sure the process for exercising a break clause goes smoothly. For further information, please contact Kimat Singh, Head of the Commercial Property team at Kerseys Solicitors in Ipswich on 01473 213311 or Kerseys Solicitors in Colchester on 01206 584584 or email us at [email protected].