Break Clauses: The Key to a Flexible Commercial Property Lease
In the current economic climate, especially with Brexit on the immediate horizon in 2019, depending on the nature of your business and outlook, ensuring flexibility when it comes to commercial leases can prove highly valuable. Whether you think you may need to respond to market conditions by scaling up or down, or moving to a different business strategy, a break-clause within your commercial lease can provide the much needed option to move out of your current premises cleanly, to seek a newer more suitable location.
Take for example the current commercial lease dispute between the Canary Wharf Group and the European Medicines Agency (EMA). The EMA are arguing that they should be released from their 25-year lease due to factors outside of their control; namely Brexit. As a result of the growing dispute, the landlord has taken the matter to Court to demand the £500,000 in unpaid rent, rates, and service charges, arguing that Brexit was not ‘unforeseeable’ due to the very existence of Article 50 of the Treaty of the European Union, which allows member states to withdraw from the EU.
Agility is key to a commercial property lease
It’s not just pure economic factors which necessitate commercial lease flexibility, the modern approach to business means that everything happens so fast. Many enterprises have embraced the ubiquitous ‘agile’ methodology, which means that businesses develop their offerings and strategy rapidly and change direction at such a pace that often those on the operations team are left struggling to keep up. According to commercial property specialists Frank Knight,
“Workplaces that facilitate agility and that are fundamentally attractive places to be, will succeed. Agile workplaces are easy to source, quick & easy to transact and make operational, are flexible in terms of commitment, and also in configuration. Attractive workplaces are places where people choose to be – they deliver a great experience”.
Given business trends are moving towards this concept of agility and flexibility, commercial landlords may need to re-think their offerings and provide tenants with the ability to react quickly as their needs change. After all, there are advantageous on all sides: landlords with flexible leases will not be stuck with tenants who are struggling financially and can replace them with more commercially stable operations.
In the meantime, break clauses are essential to flexibility
Until the new paradigm of agile commercial property arrives, one of the most effective ways to ensure flexibility to allow early termination of a lease is the ‘break clause’.
A break clause is written into a fixed term commercial lease agreement to enable the landlord and/or the tenant to terminate the lease prior to the lease end date. However, don’t automatically expect a favourable break clause to be written into your tenancy agreement; this is usually a matter for negotiation with your prospective landlord.
The exact terms of break clauses will vary from agreement to agreement, but will typically include:
- The beneficiary – i.e. who has the right to break
- When the lease can be terminated:
- A rolling break (i.e. the right to break at anytime during the term)
- After a specific date
- On a specific date (e.g. based on the date of a rent review)
- Conditions which will apply to enable the break to be applicable, which may include that the tenant must:
- Have paid all rent (or all payments due under the lease).
- Have complied with certain covenants.
- Not be in material breach of its repairing covenants.
- Give vacant possession (meaning all goods and fixtures owned by the tenant are removed, keys are returned to the landlord, and the property is fully vacated).
Or if being exercised by the landlord, the clause may state they must have an intention to redevelop the property.
- When the conditions must be met by (e.g. when the break notice is serviced, the break date, or both).
- Notice provisions – how the notice must be provided, and what constitutes a valid receipt.
It is vital for those entering into a break clause to understand the precise wording of the head of terms and its downstream implications. By minimising the extent of the conditions which must be met in order to exercise the break clause, the less chance of a dispute with your landlord when you do so. As such, it is highly recommended to seek advice from a specialist commercial property Solicitor, who can ensure your best interests are protected.
For example, any terms relating to any ‘material breach of tenant covenants’ must be handled with caution. Such a clause is simply too ambiguous and vague, meaning even the most minor of breach of covenant could render the break clause unusable.
Furthermore, the Code for Leasing Business Premises 2007 (2007 Code), states that the only preconditions a tenant should accept to exercising a break clause are:
- That the rent be paid up to date;
- The tenant gives up occupation of the property (not vacant possession); and
- The property be handed back to the landlord free of any continuing subleases or tenancies.
Anything outside of these preconditions will make the practicalities of exercising a break clause much harder and, in some cases, almost impossible. For example, if a precondition exists which obliges the tenant to have complied with every covenant in the lease, even a minor breach may give the landlord the right to object to the break clause, rendering the right invalid. The tenant may then have to wait some considerable time before it is able to try and break the lease again, meaning it will continue to be liable under the lease and will have to try and negotiate an exit from the lease in another way, which may be costly
It is therefore extremely important that specialist advice is taken prior to agreeing or signing formal Heads of Terms.
Break clauses can be highly beneficial for commercial property tenants, providing a peace of mind that should the conditions necessitate, whether positive or negative, you can free yourself of your commercial lease and its obligations. If you foresee you may use the option in the future, to maximise your chance of doing so smoothly, we recommend you prepare as soon as you can and take advice prior to agreeing any Heads of Terms. If you are unsure of the precise definition of any of the terms and conditions on the break clause, always seek legal advice.
Please note, this article does not constitute legal advice.
Hart Reade Solicitors have offices in Eastbourne, Hailsham, Polegate and Meads. We hold a Lexcel Accreditation from the Law Society of England. To make an appointment with one of our commercial property solicitors, please phone our office on 01323 727 321.