Break rights are an incredibly useful inclusion in a commercial lease permitting you to exit before the end of the term should you need to. More important than the break rights themselves however, is your understanding of how and when these can be exercised. Misunderstandings around exercising break rights can not only cause you additional time and expense but can even result in you being unable to determine your lease when planned.
Understanding break rights
A break right is exactly what it says on the tin. They allow the parties to “break” the lease, giving them a way out before the end of the term. Break rights are beneficial for landlords and tenants alike, providing flexibility to leave the lease should they need to in the future. Break rights cannot be exercised flippantly and there are conditions and timeframes which must be adhered to to ensure the break can legally take effect.
What is a break clause?
Break clauses are a valuable and important consideration with any longer-term lease, permitting the relevant party to terminate the lease before the end of the commercial lease. If considering breaking your lease you need to ensure you are familiar with whether your lease has a fixed or rolling break clause. Fixed break clauses can only be exercised at specific times, such as on the third and fifth anniversary of the term commencement date. Rolling break clauses on the other hand allow you to break the lease at any time after a set date; ie any time after the third anniversary of the term commencement date.
Who can exercise a break right and how
Break rights are not exclusive to either the landlord or tenant and your lease will confirm who can exercise the break; in some cases only the landlord will be permitted, in others only the tenant and in the remainder, the break can be exercised mutually, by both the landlord and tenant.
Break rights cannot be exercised as and when the relevant party feels like it. There are specific time frames and conditions which need to be adhered to in order for the break to take effect. Each lease will set out the conditions of the break and failure to exercise a break outside of these conditions will be invalid.
Conditions for exercising break rights
The lease will clearly set out what conditions the breaking party needs to adhere to for a break right to take effect. It is important that all of these conditions are satisfied within the relevant periods; the break cannot take effect if all conditions have not been complied with. An example of some common conditions are set out below.
Vacant possession
If you are the tenant, your lease will likely provide that you must give the landlord vacant possession at the date of the break. This means that the property is given back to the landlord free of any occupiers, whether this be you, your employees or any one who has been granted an underlease or licence by you. Keys must be returned and the property must be empty of all your belongings, fixtures and fittings.
Rents and outstanding payments
Whether you are the landlord or tenant, a break right condition will likely be included within your lease that all money owed to the other party has been settled by the date of the break. If you are the tenant, you must be up-to-date with all rent and any other payments due under the lease. Something to be cautious of here is if your rent review date falls on the same date as your break date as essentially you could be caught should a rent review kick in on the day of your break, given this may impact the sums you owe. If you are the landlord, you will need to have reimbursed the tenant for any overpayment of rent or other payments which the tenant has been paid in accordance with their obligations under the lease.
Strict interpretation
Break right conditions will be strictly interpreted and it is vital that when exercising a break right you satisfy all of the required conditions prior to any specified dates. Failure to comply with all conditions will jeopardise your position and your right to break will be invalid. Given this, it is also important that appropriate protections are provided to the landlord when drafting break conditions.
The recent case of Capitol Park Leeds PLC v Global Radio Services [22021] EWCA Civ 995 gives an example of the importance of drafting solid break conditions. This particular case focused on the tenant giving vacant possession as a condition to their break. The tenant went beyond just removing their own fixtures and fittings and had additionally stripped the property of fittings such as window sills and heating pipes meaning the property was not in a good state of repair to be immediately relet upon their vacation.
Despite this, the break conditions only specified that the property needed to be given back with vacant possession, and as the tenant had complied with this, this condition was met. There were no further break conditions that the property needed to be returned in a condition consistent with the tenant’s obligations under the lease and therefore the break was valid, despite the property not being returned in an appropriate condition.
Planning and professional guidance
It is crucial when exercising a break that you comply with the timeframes and provisions within the lease. It is recommended that you regularly familiarise yourself with the terms of your lease so you don’t overlook any important deadlines or information. If you are considering exercising a break right we would recommend that you seek advice from a legal professional who can assist you in planning for the break and ensure that the break is properly executed.
How to exercise break rights
Your lease will explain how your break right needs to be exercised. Your lease should contain provisions on when, where and how your break notice needs to be served. Your lease will also confirm what conditions need to be satisfied for that break to legally take place.
Understand the break rights terms
Break clauses are all individual and it is important that you have reviewed and understand the specific break terms attached to your break right. These terms will set out everything you need to know including relevant notice periods and conditions to comply with. tenant conditions can include decorating the property before vacating, ensuring that any alterations made during your occupation are removed and any damage caused whilst removing alterations is made good. Failure to adhere to any of the break right terms will mean that your break cannot be exercised and you will remain liable under the terms of the lease.
Give notice correctly
One of the key considerations when wishing to exercise a break clause is to ensure that you have given notice correctly. There are 3 pivotal aspects to this process:-
Timeframes: It is quite standard that a break notice is served a minimum number of months prior to the break date, therefore if your break date is 1st July 2030 and you have a notice period of 6 months you must serve your break notice on the other party by 31st January 2030 at the latest. The service date is the date the notice is received by the other party and not the date it is sent by you. Particular attention should be made to the definition of break date within the lease and any relevant notice periods.
Service format: Leases will ordinarily dictate what is considered a valid format of service for a notice. This may mean that an email is not a valid form of service and any break notice must be sent in written letter format by recorded delivery or hand delivered.
Service address: The lease will also set out where the notice needs to be sent. You cannot send the notice to the address you believe is most appropriate – the service address must be the one set out within the lease.
Failure to follow any of the above will mean that your break notice has not been served in accordance with the lease terms and may mean you have missed your window to determine the lease under the break clause.
Meet rent payment obligations
Ensure you have met any break right conditions, this includes making sure you are up to date with all payments due under the terms of the lease ie rent payments, insurance payments, service charge, business rates and utilities.
Be certain
You should be certain before serving any break notice that you are ready and able to leave the lease at the relevant break date. Once a break notice has been served it cannot be retracted or amended and you will be required to terminate the lease at the break date, even if you have changed your mind and would like the lease to continue. The service of the break notice is final and binding.
Seek professional advice
Although break clauses offer a useful and flexible opportunity to exit a lease prior to the end of the term, they are not a failsafe resource and can only be exercised during appropriate timeframes, in accordance with particular provisions and provided that relevant conditions have been satisfied. Given this, it is recommended that legal advice is sought when break rights want to be effected. Obtaining legal advice in relation to your break will not only ensure that the correct formality procedures are followed and documented but that you are fully aware of all your obligations under the lease.
How Goughs can help
The commercial property team at Goughs are fluent in the language of leases and the intricacies of break clauses. We appreciate the reasons behind why break clauses are a valuable tool and we also understand how confusing they can be to execute if you are unfamiliar with their terminology.
We want to assist landlords and tenants alike in alleviating any stress or uncertainty in how and when break clauses can be exercised. We pride ourselves in providing clear and friendly advice whilst simultaneously supporting you through the break process. Please get in contact with us if you have any questions.
