What is a break clause?
A break clause can be included in a fixed-term lease and allows either the landlord or the tenant to terminate the lease early, typically either on one or more specified dates or at any time during the term of the lease. The break clause may only be exercisable if any applicable conditions attached to it have been satisfied. Common examples of conditions include: providing vacant possession; proper notification under the break clause and all payments (often including interest for late payments) having been paid.
Exercising a break clause
A tenant or landlord should consider the list of practical issues below before exercising a break clause. The price of failing to properly exercise a break clause is likely to be far more significant than the cost of doing the following things set out below:
- Once a notice has been served of a party’s intention to exercise a break clause, it cannot be withdrawn without the consent of the other party (if each party agrees to waive the notice, a new lease is granted).
- Notice must be served in good time and in strict adherence with the lease – tenants are advised to keep evidence of their compliance with the terms of the lease and ensure that the landlord has received the notice (keeping evidence of the method posting or requesting an acknowledgment of receipt), whilst the landlord may not have to accept the notice if issued late, incorrectly or not received.
- All outstanding sums due under the lease, including any default interest due on past arrears, should be paid for the break clause to be effective. Any amounts in dispute should be paid by the tenant to the landlord on a without prejudice basis and the tenant should carry out their own interest calculations in accordance with the terms of the lease. All payments must be made in cleared funds unless the landlord has expressly agreed to accept payment by cheque.
- Vacant possession will very often be a requirement of the break clause under the lease, the tenant must ensure that the leasehold premises are vacated.
- General obligations that apply at the end of the lease should be complied with before the break date (for example removing signage). The tenant should ask the landlord for confirmation of what is required and a schedule of dilapidations.
- If the break date falls within the middle of a rental period, check whether the lease requires the landlord to refund any rent, service charge, insurance, car parking, licence fee or otherwise. The courts will not enforce a refund by the landlord unless this is specified in the lease.
Legal advice about leases and break clauses
Both landlords and tenants should be very careful when signing up to a lease and it is highly recommended to seek expert legal advice before signing one. Our team of specialist Commercial Property lawyers are here for you and your business should you need help or advice.