17 April 2020 #Real Estate
A commercial lease may include a ‘break clause’ allowing either the landlord or the tenant to terminate the lease early. The right to break may arise on one or more specified dates or it may operate on a rolling basis during the term.
In the current climate a break clause may be seen by many tenants as a lifeline to bring their contractual lease obligations to an end, but what must a tenant consider before exercising their right to break?
A break clause in almost all circumstances is likely to be conditional, as such it is important for a tenant to consider whether they can satisfy the relevant conditions, as otherwise the break may not be effective and as such the lease obligations will continue even though a break notice has been served.
Payment of ‘rents’
It is likely that all ‘rents’ are to be paid up to date before the break date. In addition to annual rent this may include, insurance rent, service charge and any other sums due under the lease (whether they are formally demanded or not). If a landlord has agreed any rent concessions in response to the Coronavirus, such sums will also need to be repaid before a break can take effect.
Vacant Possession/Free of Occupation
Normally a break will require the tenant to return the property to the Landlord at the very least emptied of their possessions, but this may extend to removing all alterations made during the term and/or removal of partitioning.
Given the current restrictions on movement and travel due to the ongoing lockdown, tenants may find themselves in a position where they face challenges in returning the property to the landlord emptied to the level required by the lease. For example, while a tenant may still be able to access the property, they may not be able to engage removal companies or contractors to re-instate the property.
As things stand, while it is acknowledged that on practical terms it may be very difficult to return the property to the landlord to the level required by the lease, this practical impossibility is not enough to negate this break condition. Accordingly, unless a tenant can return the property to the landlord to the extent required by the lease it is unlikely that a break will be effective.
Compliance with lease covenants
Similarly, a break may require compliance with lease covenants including repair and dilapidations (although it is not usual for this to be a break clause condition in modern leases). As above, a tenant may have difficulty in complying with such obligations, however, they will have to ensure compliance with such covenants in order to validly exercise a break. Landlords can waive break conditions and it may be that as an alternative, the tenant can negotiate a financial settlement with the landlord in order that they can carry out such works following the departure of the tenant.
In summary, while a break clause may provide a means for a tenant to bring their lease to an end, the effective exercise of such a break may be very difficult in the current climate. A tenant will need to ensure that it is able to satisfy all the conditions required to break the lease which landlords may seek to strictly enforce given that its options to re-let the property may be limited. We would advise that a tenant wishing to exercise a break speaks to their landlord about what can be achieved and potential alternatives.
It is also important to remember that once served a break notice cannot be withdrawn. Accordingly, for those tenants who may have validly served a break notice prior to the coronavirus outbreak e.g. with a view to moving to larger premises, they will need to negotiate a new lease prior to the expiry of their break notice if they now wish to stay put.
For further advice and assistance please contact our Real Estate Team.