When entering into negotiations for a new lease of commercial premises, a tenant should consider whether they require a tenant’s break clause.
A break clause gives the tenant a right to end the lease earlier than the agreed lease end date if certain conditions are met. The main benefit of a break clause is that it offers flexibility to a tenant and reduces the financial risk connected with a new lease. For example, if you have signed up for a ten year lease and your business becomes unprofitable or problematic due to the nature of the property, then you are still bound to pay the rent under the lease. Even if you are permitted to transfer the lease to a new tenant, you are still likely to incur significant costs in connection with the disposal. If you negotiate a right to break the lease on the fifth year of the lease term then this offers an affordable procedure to opt out of the lease.
Generally, most break clauses specify a “break date”, for example the fifth anniversary of the lease term. However, it is possible to have a “rolling break”, i.e. the ability to end the lease at any time. This option is less appealing to a landlord and will be a negotiable point when agreeing the heads of terms.
Most tenant break clauses will be subject to the following conditions:
- the rent under the lease has been paid up;
- there are no existing breaches of the tenant obligations in the lease; and
- the property is handed back to the landlord free from occupation.
The usual notice period under a break clause is around 3-6 months but this is subject to negotiation between the parties.
If a break clause is agreed then you should ensure that the lease obliges the landlord to refund any payments that have been made under the lease (rent, service charge etc.) and which relate to the period after the break date.