Commercial Lease Transactions
Break clauses - a practical guide for commercial tenants
In a changing market, tenants taking a commercial lease look for as much flexibility as possible in order to protect their business. A break clause is a useful way to do this. The law relating to break clauses, however, can easily result in a tenant losing their right to break.
Avocet Industrial Estates LLP v Merol Ltd 
In Avocet Industrial Estates LLP v Merol Ltd , a tenant lost its right to break due to interest generated on previous late payments of rent. Approximately £130 of undemanded contractual interest resulted in an unsuspecting tenant losing the right to break. This case highlighted the importance of strict compliance with break clauses.
Avoiding the pitfalls of exercising a break clause
- Strict compliance with the lease terms is mandatory. However small, technical or unfair a breach of the lease may be; if the right to break is conditional on full compliance of the tenant covenants, a breach can result in a tenant losing the right to break. This is the case even if the landlord’s motive for trying to defeat the break is questionable.
- Service of a break notice must be strictly complied with. Tenants can trip up where they are unclear as to the correct address and method for service, and whether service should be on their landlord or their landlord’s agent. The exact provisions for service as per the lease must be adhered to. It is wise to take legal advice before serving the break notice to ensure it is served correctly.
- Ensure you comply with all timeframes for making payments, complying with covenants and giving vacant possession. If dates are missed or steps are taken too early, whether it affects the landlord or not, a tenant can lose their right to break.
- Where a break clause is expressed to be conditional on substantial or material performance of tenant covenants a tenant may argue that the condition is complied with if there is a minor breach that does not prevent the landlord from re-letting or selling the premises without delay, loss or expenditure, and it would only result in a minor loss to the landlord’s interest.
- It is the tenant’s duty to calculate all sums due under the lease if this is a condition of the break clause. If rent is paid quarterly, then a tenant should pay a full quarter’s rent in advance even if the break clause falls within the quarter. Whether they have been demanded by the landlord or not, it is wise to also consider and pay all other amounts owing, such as service charges, insurance rent and additional costs, in addition to the rent. You can always try to claim back any overpayment after the break has been exercised.
- If a tenant’s break notice does not comply with the express requirement of the break clause, it will be ineffective however, a small error that is not in relation to a specific requirement of the break clause can be effective, if a ‘reasonable recipient’ could ascertain what the notice intended.
- If you believe that you have complied with break clause conditions, you should tell the landlord. Ask them to confirm whether they agree and if not, to explain why. A tenant may be able to rely on this response, or lack of response, as a landlord could be expected to correct a mistaken belief that is communicated by the tenant.
Most importantly, the above guidelines will always be subject to the terms of the lease. It is, therefore, vital that you are aware of the requirements in your lease. You should also start to prepare for the break notice in plenty of time before the break date.