Break clauses in leases – What do they do?
In leases, break clauses serve as important provisions that can provide for either or both landlords and tenants to terminate the lease before the term of the lease runs out, subject to certain conditions and notice requirements.
Break clauses have an extensive background in litigation and history and have implications that both parties should carefully consider. This article aims to highlight key aspects of break clauses in leases, outlining their effects, considerations for landlords and tenants, and the importance of seeking legal advice when exercising them. Break clauses can be included in both residential and commercial leases, but this article will primarily focus on commercial leases.
What is a break clause?
A break clause is a contractual provision that grants one or both parties the right to terminate a lease prematurely. It acts as an escape route, allowing parties to exit a lease early, providing flexibility in an ever-changing business environment. It impacts all parties, so it is important that both landlords and tenants have an understanding of them. The points for each party to consider differ slightly in detail and are discussed below.
Conditions
Break clauses are typically subject to specific conditions, such as the payment of outstanding rent, compliance with repair obligations, or vacant possession. You could also agree on a condition to be met by the tenant or the landlord.
Points for landlords to consider
For landlords, it is vital to carefully draft break clauses to ensure they protect their interests. Ambiguous or poorly worded clauses can lead to disputes and uncertainty. Seeking legal advice when drafting a break clause can help landlords avoid potential pitfalls.
Notice periods
Break clauses nearly always require the serving of a notice by the party wishing to terminate the lease. The notice period can vary, but it is important for landlords to clearly specify the required length of notice in the lease. The Landlord must consider how long will it take to rent the premises out again or to conduct work to ensure the premises is up to date.
Points for tenants to consider
Tenants must thoroughly review the conditions associated with the break clause. These conditions may include obligations such as the reinstatement of alterations, payment of outstanding sums, or compliance with repair obligations. Failure to fulfil these conditions can lead to the break clause being invalidated, potentially leaving the tenant unable to end the Lease and in turn to serve out the remainder of the existing term of the lease.
Timing and flexibility
Break clauses do provide tenants with the opportunity to reassess their business needs and exit a lease if necessary. The tenants’ business may have increased to require bigger premises or different needs which the existing premises are unable to provide. However, tenants should be cautious about the timing of exercising the break clause. Check the wording of the amount of notice required and the obligations in the break clause. If the break clause requires the notice to be on “pink paper” and provided to the landlord at least 3 months prior, then this is what you must do! It is essential to consider market conditions, relocation logistics, and the impact on the business before deciding to terminate the lease.
Notice periods
Like landlords, tenants must carefully adhere to the notice requirements specified in the lease agreement. Failure to serve the notice within the specified timeframe could result in the continuation of the lease and the tenant will continue to be required to fulfil their obligations for the remaining term.
Seeking legal advice
Exercising a break clause can have significant implications for both landlords and tenants. Due to the complexity and potential risks involved, it is strongly recommended that clients seek professional legal advice before taking any action. An experienced solicitor with expertise in property law can review the lease, clarify obligations, and guide clients through the process, ensuring compliance with legal requirements and safeguarding their interests.
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This is not legal advice; it is intended to provide information of general interest about current legal issues.
