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Design break clauses carefully

There is a natural tension that exists between landlords and tenants negotiating a break clause.

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Published 12 May 2023

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Broadly, a tenant will want the flexibility to bring a lease to a close easily, with the landlord wanting security of income. How they are worded will deliver both.

A break clause allows a tenant or landlord to call time on a lease early. They are commonplace and have historically offered little room for negotiation. With ongoing economic uncertainty, they are increasingly under the legal spotlight.

While landlords may be more willing to accept greater flexibility in some break clause terms, the rigid requirements to exercise that break will remain. Get them wrong and the tenant is tied for the duration of the lease.

Often, the starting point for negotiation is the requirement for vacant possession to exercise a break. The need to have fully exited a building, having removed any additions and completed all works, can be difficult and costly. Vacant possession can be challenged on as little as furniture being left behind.

Increasingly common is a lease that states the tenant will instead ‘give up occupation’, leaving no occupiers or subtenants but offering greater flexibility on works, furniture or fittings.

Irrespective of negotiated changes, to successfully exercise a break clause a tenant must follow to the letter the precise wording and timing. This will mean annual rent will need to be paid in full. Lease wording may require service charges and insurance rent to be paid in full before a break can be triggered, but here too there is room for negotiation. The Lease Code requires rent to be paid in full but not insurance rent and service charges. While those will need to be paid, they should not hold back the ability to trigger a break.

What is rarely negotiable is the need to adhere to the timings of when a break notice can be served. If missed, that window will close, and the lease must be honoured in full. When issuing a break notice, you should consider instructing a solicitor, who will ensure all formalities are dealt with.

For more information, visit our Real Estate page.

This article was first published on 11 May 2023 by Property Week.

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Shorter Reads

Design break clauses carefully

There is a natural tension that exists between landlords and tenants negotiating a break clause.

Published 12 May 2023

Associated sectors / services

  • Commercial real estate

Broadly, a tenant will want the flexibility to bring a lease to a close easily, with the landlord wanting security of income. How they are worded will deliver both.

A break clause allows a tenant or landlord to call time on a lease early. They are commonplace and have historically offered little room for negotiation. With ongoing economic uncertainty, they are increasingly under the legal spotlight.

While landlords may be more willing to accept greater flexibility in some break clause terms, the rigid requirements to exercise that break will remain. Get them wrong and the tenant is tied for the duration of the lease.

Often, the starting point for negotiation is the requirement for vacant possession to exercise a break. The need to have fully exited a building, having removed any additions and completed all works, can be difficult and costly. Vacant possession can be challenged on as little as furniture being left behind.

Increasingly common is a lease that states the tenant will instead ‘give up occupation’, leaving no occupiers or subtenants but offering greater flexibility on works, furniture or fittings.

Irrespective of negotiated changes, to successfully exercise a break clause a tenant must follow to the letter the precise wording and timing. This will mean annual rent will need to be paid in full. Lease wording may require service charges and insurance rent to be paid in full before a break can be triggered, but here too there is room for negotiation. The Lease Code requires rent to be paid in full but not insurance rent and service charges. While those will need to be paid, they should not hold back the ability to trigger a break.

What is rarely negotiable is the need to adhere to the timings of when a break notice can be served. If missed, that window will close, and the lease must be honoured in full. When issuing a break notice, you should consider instructing a solicitor, who will ensure all formalities are dealt with.

For more information, visit our Real Estate page.

This article was first published on 11 May 2023 by Property Week.

Associated sectors / services

  • Commercial real estate

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