Understanding a break clause in a commercial lease

Whether you are a landlord, tenant or subtenant party to a commercial lease, you need to know about break clauses. Understanding your options is imperative should you need to end the lease before the end of the contractual term.

Fleur Uren, Solicitor in Coodes’ Commercial Dispute Resolution team, highlights the considerations in exercising a break clause for landlords and tenants in commercial leases.

What is a break option?

A break option refers to a provision in a lease which enables one or both parties to end the lease before the end of the contractual term. There may be requirements to fulfil in respect of service and timing, so it is important to carefully follow the provisions set out in the lease.  Those able to exercise a break clause should be aware time is of the essence to make sure the required steps are taken,  unless the lease states otherwise.

Who can exercise a break clause?

The terms of the break clause will specify who can exercise the break clause. It may be exercisable to one party, or the right may exist for both parties. The terms of the individual lease need to be reviewed to identify who can exercise a break clause.

When can the break clause be exercised?

A break option will often contain strict time limits in order for it to be used effectively. A break option may be exercisable:

• On fixed dates
• At any time on or after a fixed date
• On the occurrence of a certain event

Serving a break notice

It is essential to comply with the specific requirements set out in the lease when serving a break notice. To get a break notice wrong could lead to the notice being deemed invalid and worst-case scenario the lease continuing to the end of term if no further provision for a break.

Most leases will contain a clause which details how the notice should be served and can include methods of service such as hand delivery, registered post or recorded delivery. In some cases, the lease may also provide alternative methods of service provided the recipient acknowledges receipt of the notice.

In addition, it is important to correctly calculate the date by which the break notice should be served. The lease will often specify a particular date or a period within which the notice must be served. Any miscalculation of the date will deem the notice invalid.

The notice must be served on the correct party. This is usually the person in whom the legal title is vested at the time notice is served. However, some leases may allow for service on an authorised agent.

Finally, the lease should be reviewed for any conditions that must be fulfilled before a break notice can be served and take effect. These conditions could include requirements such as payment of all rent due, fulfilling repair obligations or providing vacant possession (to include removing people and chattels!). If you are considering serving a notice or have received one, we would strongly recommend obtaining legal advice.

The importance of following break notice requirements

The importance of reviewing your lease for conditions which must be fulfilled before serving a break notice was clear in the case of Sirhowy Investments Ltd v Henderson and another [2014].

In this case, the tenant’s right to break the lease was conditional on absolute compliance with the lease covenants. The tenant attempted to exercise the break clause, and the court later found that the tenant was in breach of the repairing covenant due to a failure to repair a fence at the property. This minor breach resulted in the break notice being invalid. The tenant was liable for £70,000 in damages and the lease continued beyond the break date.

Next steps

If you require advice and assistance regarding a break clause, please get in touch with Fleur Uren. You can email fleur.uren@coodes.co.uk or call 01872 246 238. Alternatively, you can fill in our online contact form.