Break clauses: implications for landlords and tenants
Break provisions allow tenants and landlords the right to terminate their lease before the expiry of a fixed term.
A break clause is usually exercised on a fixed date during the lease term although rolling breaks, which are exercisable at any time during the term, can also be agreed.
Break clauses are generally regarded as disadvantageous to landlords and beneficial to tenants. However in the current financial climate, landlords are more inclined to agree to break provisions in order to attract and secure tenants.
With conflicting interests what are the implications for landlords and tenants in agreeing break provisions?
Implications for the landlord
The risks for a landlord of allowing a break provision are an increased possibility of empty premises and the associated cost of business rates, losses through lower or no income and the danger that premises are returned in a worse condition than at the start of the lease.
To protect themselves landlords should seek to attach a number of pre-conditions to the exercise of a tenant-only break right.
These will usually include:
- an obligation on the tenant to have paid the rents due, to avoid dealing with arrears
- compliance with the tenant covenants in the lease, so that the premises are returned in the condition required by the lease
- vacant possession of the premises before the break right can be successfully exercised.
If any of the conditions have not been fulfilled, unless otherwise agreed with the landlord, the break right will be fettered.
However, there is a lot of case law surrounding the interpretation and compliance of break clauses. As tenants have become alert to the problems of strict compliance, the pre-conditions are being watered down by phrases such as ‘material compliance’ and ’substantial compliance’.
Recent case law suggests that there is an onus on the landlord to co-operate with the tenant and that landlords will need to be more aware of their conduct in dealing with tenants where a tenant has made all reasonable efforts with the landlord to establish what is required in order to exercise their break right.
A landlord may protect themselves further, by only agreeing to a break right on the basis that it is personal to the current tenant. If the tenant then assigns the lease, the break right will fall away and the new tenants will not benefit from it.
Implications for the tenant
Break provisions benefit a tenant who wants the security of a long term lease with the flexibility to deal with an uncertain future. A tenant will usually seek to minimise or remove any pre-conditions and the extent of compliance with them.
The Code for Leasing Business Premises in England and Wales 2007 seeks to address some of the problems tenants face and recommends that pre-conditions should be limited to provide that the principal rent that has been demanded has been paid, that there are no subsisting sub-tenancies and that the tenant has given up occupation. Whilst the Code can be used by tenants in negotiations, compliance with it is not compulsory and ultimately it will depend on the bargaining power of the parties as to what is agreed.
One difficulty a tenant faces is that they will need to demonstrate that they have complied with the pre-conditions in order to successfully exercise their break right.
As suggested above, whilst the courts are more prepared to take a sympathetic view on compliance of landlord conditions, a tenant will need to actively engage with their landlord to establish what is required of them.
The ultimate risk to the tenant of not complying with the conditions will of course mean that they cannot exercise their break right successfully.
To avoid negotiating a break right, a tenant may want to consider a shorter term lease that is protected by the Landlord and Tenant Act 1954.
Break provisions are the source of many disputes between landlords and tenants, both in negotiating the terms, in exercising the break right and in complying with the conditions.
Landlords and tenants therefore need to be extremely careful in dealing with any aspects of a break clause and should seek legal advice at the earliest opportunity to avoid lengthy disputes.
If you would like to discuss matters raised in this article further please contact Roger Wilkinson or Richard Hemingway.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.