Break Clauses in Commercial Leases

In today’s competitive commercial property market tenants are looking to introduce as much flexibility as possible into their leases in order to protect their future business interests. This will often include a break clause which gives the tenant the right to bring the lease to an end part way through the agreed term.

However, t here ARE risks!

Break Clauses: The risk of non-compliance

A recent High Court case has issued a stark reminder that any pre-condition to a break clause must be strictly adhered to in order to determine a lease. In Avocet Industrial Estates LLP v Merol Ltd [2011] the tenant was required to comply with a relatively common requirement – to pay all sums due under the lease by the break date. 

 During the term of the lease the tenant had fallen into arrears resulting in interest becoming due, the lease did not however require the landlord to issue a demand for payment of interest. The tenant served an appropriate break notice and in the run up to the break date neither party raised the issue of interest.

On the break date the tenant settled the outstanding annual rent and wrote to the landlord expressing its belief that all sums due had been paid. The landlord did not challenge this assertion at the time but did so after the break date arguing that as a result of unpaid interest the break had not been validly exercised.

 The Court found in favour of the landlord and the tenant remained liable to comply with the provisions of the lease until expiry of the term. The annual rent was £67,500; the unpaid interest amounted to £130.

 In view of this, it is crucial that both tenants and indeed landlords carefully consider the requirements for compliance with break clause pre-conditions. A tenant seeking to break their lease must ensure that all payments due are made and cannot rely on the premise that the sums actually demanded are the only payments they are liable to make.

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