16 March 2023
What is it?
In simple terms, it is a “get-out” card for the party exercising it. A means of exiting the lease prior to the official end of the term. If exercised correctly, the lease is broken and both parties walk away, free of their obligations under the lease.
Who does it benefit?
It benefits the party exercising it as they no longer need to continue to fulfill their obligations under the lease for the duration of the term. Particularly useful, for example, where a tenant is no longer able to pay the rent due to poor business. In such a scenario, they may exit early by terminating the lease on the break date (discussed further below) as opposed to being continually obliged to pay rent for the duration of the term of the lease.
Conversely, it could benefit a landlord in an instance where they have been offered a much higher rent by a new and financially more viable tenant, who wishes to take the premises sooner than the end date of the existing tenancy. The landlord may then exercise its right to break the lease on the break date thereby taking back possession of its property sooner than the end date, so that it can let it out at a higher rate, to a more financially viable tenant.
How does it come into play?
Best practice is to negotiate such a clause when negotiating other terms of the lease. It can be applicable to only the landlord, only the tenant or both parties. It can come into play at any stage of the lease term as agreed between the parties and there can be more than one break.
Often, conditions are attached to a break clause where this is exercisable by the tenant, such as, all rents must be up-to-date and the tenant must provide vacant possession upon breaking. Care must be taken when reviewing such conditions whether acting for the landlord or tenant.
These conditions should not be taken lightly and should always be reviewed by an expert as some conditions may be drafted deliberately widely, leaving the complying party in a vulnerable position where compliance can be subjective. For example, a condition may be that the tenant must have complied with “all its obligations under the lease”. A landlord not wanting the tenant to break may rely on this condition and refuse to allow the tenant to break due to it not having complied with the clause that states “the windows to be cleaned as often as necessary”. Whether or not a window is clean is subjective but this shows how something as simple as cleaning a window, can become the deciding factor as to whether or not a tenant may effectively exercise their right to break.
Types of Break Clauses
A break clause may sometimes be exercised at any time after a certain date. This is often referred to as “rolling break”.
Quite often, a break may only be exercised on a fixed date or dates. This is often referred to as a “fixed break”.
Implications of getting it wrong
Careful consideration should be given when drafting and/or reviewing such clauses as an error can lead to a break clause being invalid resulting in the party being unable to exit at the desired sooner date.
It is also imperative, that a notice to exercise a break clause is drafted correctly and served in the correct time and manner, in order for it to be validly served.
The case of Siemens Hearing Instruments Ltd v Friends Life Ltd [2014] 2 P&CR 5 illustrates just how important it is to word the break notice in the required explicit form. In this case, the Court held that the break notice served, was invalid as it failed to express the exact wording of the break clause and should have explicitly stated that it was served under section 4(2) of the Landlord and Tenant Act 1954.
Today’s market
Given the uncertainty in today’s property market, it may be more essential that ever before to ensure you’ve got this clause right. Exiting at precisely the right time may determine whether or not your business will survive!