What Is A Break Clause, And Why May I Need One In My Commercial Lease?
Posted on 12th June 2020
When looking to commercial property matters, there are a number of different factors that are to be considered, as opposed to residential transactions. It is, therefore, a good job that our team are experts at what we do, and know exactly what to look out for. Our team of property conveyancing solicitors offer a range of services, which can be viewed, here. So, for all of your conveyancing queries, be it a residential or commercial matter, contact our local solicitors today, at email@example.com.
When dealing with commercial property leases, there are some key items that your property conveyancing solicitor will be considering. The lease, fundamentally, provides a right for the tenant to occupy the premises, on the basis of the terms stipulated within the lease. It is, therefore, important that your conveyancing solicitor reviews these terms, to ensure the same are reasonable and agreed.
The important considerations include matters such as: the term of the lease, rights to alter the premises, the insuring of the premises, the security, rent review provisions, the list goes on. For more on commercial property leases, and their terms, see our Preston solicitors’ blog, here. One key consideration does, however, lead us to break clauses.
What is a break clause?
A break clause can be an important provision to have in place, within your commercial property lease. It essentially, allows for a right to end the lease, before the expiry of the term agreed.
This allows the early opportunity for the lease to be determined, without waiting for the term to come to an end, and can be made in favour of the landlord or tenant, or both. It is, therefore, essential to ensure that the clause has been appropriately drafted. Your commercial property solicitor will, of course, be able to advise you in this regard.
This can bring about certain advantages, and of course disadvantages, for both the landlord and tenant.
- The early opportunity for the lease to be ended, should the need arise.
- Entering into a lease, particularly a long lease, can be a big commitment for a tenant. If, therefore, unforeseen circumstances arise which mean the lease needs to be ended, the break clause would allow provision for this.
- This can be an opportunity for the tenant, as it says on the tin, to break free from the lease, inclusive of any particularly onerous, or restrictive, terms imposed upon them by the landlord.
- This would also allow the landlord to determine the lease, in the event that they were dealing with a testing tenant.
This can be disadvantageous, to the party being served with the notice of the break clause, in that, the landlord may be left with unoccupied premises, and nobody to make rent payments to them, which can make the same an added financial burden. In contrast, should the landlord opt to break the lease, the tenant may be left without premises to carry on their business dealings, having a detrimental impact on their livelihood. This is why, in some cases, the insertion of a break clause may be a less favourable option. This brings us to the drafting of the clause, which should be written to protect the parties, and their needs, accordingly.
As you can see, there can be mutual advantages, and disadvantages, on the part of both the landlord and tenant. This, therefore, makes the consideration of a break clause of extreme importance, and striking a balance in this regard, before agreeing the terms and proceeding to Completion of the Lease.
What should I consider?
Ok, so we keep reiterating that such clauses should be carefully considered before proceeding, but what exactly should you be considering?
- Term: The term of the lease being entered into should be a starting point. This will, in turn, help decide the degree of flexibility that is required. For example, entering into a 99-year lease would bring about very different requirements in respect of a break clause, as opposed to a 3-year lease. So, think about the term of the lease, and at which point(s) a break clause may be necessary.
- Success: For an incoming tenant, it is important to be realistic about the success of their business, particularly if the business is just starting out. Whilst MG Legal’s solicitors in Preston would wish nothing but the best, and endless success for our valued clients, it is important to consider the ‘what ifs’. What is the business does not take off, leaving the tenant with debt, and a business premises that are no longer needed? A break clause would allow the early opportunity for the lease to end, to relieve the tenant in this respect. On the contrary, what if the business takes the market by storm and is a huge success? The original premises may become too small, with the need for increased stock and staff, there may be a need to vacate and relocate to larger premises which, again, could be assisted by a break clause.
- Lease conditions: As a landlord, the insertion of a break clause may be required, in order that there is a safety net option, should a difficult tenant move in, who does not comply with the lease terms, for example. This would allow the lease to be determined, and for the landlord to seek a new, more favourable tenant.
What if a break clause cannot be agreed?
As we have discussed above, a break clause can be an advantageous insertion to your commercial property lease. As we have also discussed, the same can be viewed disadvantageously, which may mean the same cannot be agreed upon. So, what if an agreement in this respect cannot be reached?
- Consider the future: Entering into a lease can be a big commitment and, once Completed, forms a legally binding agreement. Proceeding without a break clause can amount to a degree of uncertainty as, should any unforeseen events occur that would require the lease to end, there would be little degree of flexibility in such instance, which could leave either party in a predicament.
- Alternatives: Whilst a break clause would be the ideal circumstance, if the same cannot be agreed upon, it is worth considering the alternatives. Consider whether an agreement in terms of sub-letting may be permitted in order that, should the need arise, the tenant has the option to sub-let the premises, without actually ending the lease itself. A break clause should, however, always be proposed first, before considering other options, as this would provide the most security in this respect.
- Renegotiate: If reaching an agreement is proving tough, it may be time to go back to the drawing board and re-negotiate. There is a need for a mutual relationship between the landlord and tenant, and it is encouraged that the same is amicable and reasonable to avoid dispute. It is, therefore, important to lay all of your cards on the table, in order to reach an agreement that suits all parties.
How does the break clause work?
Subject to the drafting of the clause, this is affected by serving notice on the other party, i.e. the tenant serving notice on the landlord, that they wish to determine the lease by exercising the break clause.
There will be requirements in connection with serving the notice, for example:
- Time scales: Advising the time frames in which the notice is to be served, in order to be effective.
- Form: Confirming how the notice is to be set out, for example, by way of a written letter that has been signed by the party wishing to affect the break.
- Delivery: Noting the way in which the notice is to be delivered, for example, whether this is accepted via email, post etc.
It is important to be aware of the above requirements in order that, should the need for the break clause to be utilised, the same can be carried out in accordance with the stipulations of the lease.
Where do I start?
Your answer – right here. MG Legal have an expert team of commercial property solicitors who deal with commercial leases on a daily basis. Our team know all of the do’s and don’ts when it comes to commercial property leases, which should make us your first choice when instructing a solicitor to act on your behalf.
Our glowing reviews note our five-star service, which you can see for yourself, here.
So, contact MG Legal today, by submitting an online enquiry, here, where our local solicitors will be on hand to assist you.
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