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Break Clauses: avoiding pitfalls when terminating leases

The end of local and national lockdowns signaled a welcome return of footfall to shopping centres and high streets.  As life begins to get back to relative normality, staff up and down the country have been returning to their offices and places of work.

What is a break clause?

However, with the acceleration of agile working, many businesses are contemplating how to exit their commercial leases earlier than the stated expiry date, which may be some years away.  This will especially be the case where their premises have become too costly, no longer suit the business needs, or where a better deal may be available elsewhere.

One obvious way to do this is to exercise a break right, where a lease contains an express option to terminate the lease at a certain point. This may sound simple, but it is also a potential trap for the unwary.  Those who fail to understand the importance of the precise drafting, how to serve a break notice, the subtle nuances of language often associated with break clauses or the unforgiving approach of the courts, may run into difficulties very quickly.

Common mistakes when serving a Break Notice

The judgment given by Lord Hoffman in the House of Lords decision in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] is a reminder of the consequences of getting these notices wrong, emphasising that If the clause said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper, however clear it might have been that the tenant wanted to terminate the lease.”

Typical errors which may prove fatal to the exercise of a break notice include:

  • not serving the Notice to the correct legal person;
  • not computing notice periods correctly;
  • failing to take into account any supplemental document which changes the nature of the original clause;
  • failing to comply with conditions associated with the break clause: and
  • failing to make the correct payments as a condition of the break.

In situations where there is no ‘rolling’ break, the tenant could inadvertently be locked into a lease it thought it had terminated, leading to additional unexpected costs for many years more than should have been the case, maybe even to the end of the full term. Even where there is a ‘rolling’ break right this may entail a period of many months more than would have been necessary, had proper legal advice been obtained.

Using a break right as a negotiation tool

However, used and exercised properly, a break right can be a very useful tool to achieve a business objective. This may not necessarily be with a view to vacating premises but to initiate a conversation with a landlord to achieve improved terms on which one may be prepared to stay. Many clients of Druces have achieved exactly that: moving from full rents to discounted, turnover or negligible rents, often inclusive of many of the usual property costs. However, to be able to use this to full advantage, it is imperative that the notice is valid.

From the landlord’s perspective, they will want to know whether a notice they have received from a tenant is valid, properly served and whether any relevant conditions have been strictly met.  The answer to these questions will determine if they can object to the notice in order to avoid a costly void period or, potentially, to negotiate a premium for the surrender of the lease with the tenant.

Further information

If you are a landlord or tenant of any commercial premises and would like to know more about the issues raised in this article, or about our wider Real Estate and Dispute Resolution services, please contact: 

Michael Pidge

Michael Pidge

Senior Associate

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