Katie Hughes, Solicitor with AMD Solicitors considers the tricky area of break clauses and the importance of getting it right.
A break clause entitles the benefiting party to terminate the lease term early without penalty and can provide welcome relief to the tenant who wants out of their premises early or the landlord who wants to develop.
As a consequence of the economic climate over the past few years, break clauses have become increasingly vital for the tenant looking to rent their first commercial premises or expand into bigger premises or, the tenant who took on a lease when the rental market was at its peak and now cannot afford to pay the costly rent. With the commercial rental market not as buoyant and tenants harder to find, landlords have been reluctant to let good tenants walk away from the lease early.
A break date can either be a specific date within the term or at any time during the term on a rolling basis. Break clauses are generally conditional but beware some conditions are more complicated than they first seem. For the party with the benefit of the break clause, it does not pay to be complacent, as the consequence for not strictly complying with the break clause conditions is lost opportunity and the associated financial implications.
A recent High Court case highlighted the need to be vigilant when exercising a break clause. In that case the lease entitled the tenant to terminate its lease on 11 October 2010 upon giving 6 month’s notice, vacant possession and paying “the rents reserved and demanded by this lease up to the termination date”. The annual rent was payable by the tenant in four equal instalments. The tenant served a break notice on the Landlord and paid the rent up to 12 October 2010. The Landlord argued that the break notice was ineffective as the full quarter’s rent should have been paid and not just to the break date. The High Court ruled in favour of the Landlord and held that the tenant had failed to comply with the conditions of its break clause!
Where a break clause is exercised successfully, the lease will come to an end and any future liabilities will cease. The parties to the lease will generally not be released from liability for any breaches of covenant which occurred prior to the break date and in these circumstances damages can be claimed.
For more information about break clauses, please contact Katie or one of her colleagues in the Commercial Team. The Commercial Team offer advice and information upon legal issues for businesses (including a free first a half hour consultation). E-mail firstname.lastname@example.org or telephone 0117 973 3989. AMD have offices at Henleaze, Shirehampton and Clifton. For a full list of our services, visit www.amdsolicitors.com.
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