Break Clauses: Tenants beware

A break clause allows a lease to be determined before the end of the contractual term. However, a break clause must be exercised correctly in order for the early termination of the lease to be valid.

When negotiating the lease terms, a tenant should ideally always try to insist upon an unconditional break. However, landlords rarely accept this and it is very common for break clauses to only be exercisable after certain conditions have been met. This is where the majority of problems arise for tenants.

Typical break conditions include the following:

• Repair obligations: A tenant should avoid any condition that obliges a particular standard of repair of the property at the break date. This is because a landlord will find it easy to find fault with the repair of a property and argue that the break is invalid.
• Compliance with all tenant’s covenants: This condition must be treated with caution by tenants – a very minor breach of covenant could see the exercise of the break clause, and therefore the termination of the lease, rendered invalid.
• Payment of “all sums due”: It can be very difficult to negotiate away a condition that requires a tenant to have paid “in full all rents due under the lease to the expiry of the break notice” as landlords will always seek to keep themselves in the best position possible in terms of rent recovery.
• Not only does this wide ranging condition cover annual rent due to the next rent payment date but, depending on the terms of the particular lease, could mean insurance rent, service charge, VAT and any interest charge on late payment!
• Tenants should also be aware that the ‘next rent payment date’ could mean a date after the official break date. The case of Marks and Spencer v BNP Paribas in the Court of Appeal recently confirmed that in the absence of an express clause, sums paid for any period after a break date need not be refunded by the landlord.
• In order to mitigate the potentially harsh effects of an “all sums due” clause it is important that an express clause, ordering the repayment of any funds which relate to time after the break bate, be included in the lease.

The steps which a tenant must take prior to exercising a break clause can be onerous, but must be closely followed in order to avoid the risk of the break clause being improperly exercised. Failure to correctly exercise a break clause could potentially see a tenant, who perhaps has committed to occupying a new property, liable for the rent, service charge and other payments due for both properties. The financial implications of this scenario could be crippling for a tenant’s business.

There are countless examples of cases where tenants’ agents have negotiated conditions of break clauses, their lawyers have documented those conditions, and then the tenants themselves have exercised them only to find that they have actually done so incorrectly. The effect is that the break is inoperative and the lease continues until the next break date or for the remainder of the contractual term!

Tenants beware.