Small businesses are facing economic challenges and many are not predicting growth in 2017.
In order to protect their best interests, tenants may be looking to exercise the break clauses they agreed when they arranged the lease for a commercial property. While break clauses can serve a particular purpose, are you aware of the implications?
Below is advice on activating a break clause and insight into how you can go about doing so in the smartest way.
What is a ‘break clause’?
A break clause is a provision in a lease which allows the landlord, the tenant or both, to end the lease before the end of the term. Depending on how your lease has been drafted, the right to break may arise on one or more specific dates and a break clause may only be effectively exercised if any conditions attached to it have been satisfied.
So, this all sounds straightforward, however, your ability to exercise a break clause (where pre-conditions are attached) is not so simple.
What problems should you be aware of?
Well, as a tenant you will be looking out for your best interests, but so will your landlord. Many landlords will want to keep their tenants and will not want them exercising their break clauses.
Therefore, the conditions put on break clauses will be expected to be complied with entirely and landlords will thoroughly examine any occasion where tenants may have broken their break clause conditions. This can make for complicated discussions and can often lead to disputes and on some occasions, litigation.
Some of the typical pre-conditions that can be attached to a break clause include the tenant:
- making all of the payments agreed within the lease
- giving vacant possession
- complying with all of the covenants within the lease.
The payment of rent pre-condition is what is referred to as an ‘absolute condition’ meaning any breach, regardless of the triviality will prevent you, the tenant, from being able to activate a break clause. A condition relating to general compliance with covenants leaves much room for dispute.
Points to be taken into account for tenants wishing to activate their break clause
- Compliance with all of the conditions attached to your break clause is essential and keeping evidence of this compliance (receipts, photographs etc) is also worth doing.
- Make sure it is the right decision for you – once a tenant has activated their break clause then they will be unable to go back on that decision on their own.
- As the tenant you should make sure you leave sufficient time to fulfil all of the conditions within the break clause before going ahead with exercising it.
Something to remember – if you are a tenant is in the process of a break clause or it is a future plan, it is important to remember the condition of vacant possession. This condition does not just involve a tenant moving all of their belongings out of the landlord’s premises; it in essence means to remove all evidence that you were ever a tenant there. Any tenant must therefore move all belongings and people connected with them (unless the landlord has said otherwise in writing) to ensure the break clause is valid.
Take expert legal advice
If you are planning on entering into a lease always seek expert legal advice.
When discussing and agreeing on the heads of terms for your lease, having advice from a legal expert can put you in a much better position to negotiate the terms and you will feel more prepared to insist your break clause should not be subject to pre-conditions.
If you are a tenant, seeking expert advice can put you and your business in a better position from the outset; this short term outlay of paying for a solicitor’s time will save you money in the long run. By making the right decisions at the beginning, you could also save yourself money in the long run by avoiding any legal conflict. A dispute or litigation can be expensive.
If you wish to discuss the legal implication of a break clause with a legal expert, please contact Caroline, our Head of Commercial Property.