A break clause can be included in a fixed term commercial property lease allowing either the landlord or the tenant (or sometimes both) to terminate the lease early by giving a period of prior notice. Whether you are the landlord or the tenant, you should consider the terms of any break clause in your lease very carefully to ensure that you do not get caught out by the traps!
The right to break may arise on one or more specified dates or at any time during the lease period on a rolling basis. Conditions to a right to break are usually imposed and must be strictly performed to ensure that the break is correct and effective.
Specific conditions for the operation of the break may include:
- A specified period of prior notice.
- Payment of all the rent and other payments due under the lease.
- Performance of all lease covenants.
- Compliance with tenant repairing covenants.
- Vacant possession must be given by the tenant.
- Payment of a penalty to exercise the break.
Even a trivial breach of the conditions by a tenant can be fatal to the break right. Here are some examples:
In the legal case PCE Investors v Cancer Research  the High Court considered whether a tenant had complied with a break clause where it paid rent up to the break date, rather than the full quarter's rent. The break clause required the tenant to give vacant possession and pay "the rents reserved and demanded by this Lease up to the Termination Date". The court held that the tenant should have paid the full quarter's rent to validly terminate the lease, even though this period would have gone beyond the break date. Even if the tenant had paid the full quarter’s rent, they would not have been able to recover the overpayment unless the lease had expressly allowed it.
In Avocet v Merol  the conditional break clause was held to be invalid because the tenant had paid rent late in the past, so interest was strictly due on the arrears. The tenant was not aware of the interest and the landlord was under no obligation to tell them, therefore the tenant had not paid all sums due under the lease by the break date.
In Riverside Park Ltd v NHS Property Services Ltd  the tenant had left behind internal non-structural partitions and the court decided that this meant that “vacant possession” had not been given and hence the break was held to be invalid.
One of the most common pitfalls of a break clause is service of the break notice. Who must serve the notice? On whom? At what address? Is the notice valid if served by email? What date must the notice be served on or by? Is there a prescribed form of notice which must be used?
In Prudential v Exel UK  a break was held to be ineffective because the notice was served by only one tenant company, when the lease required notice to be given by both the tenant companies named in the lease.
The effective exercise of a break clause brings the lease to an end and the notice cannot be withdrawn unilaterally. The parties may mutually agree to the break notice being withdrawn but this is deemed, as a matter of law, to constitute the creation of a new lease.
With all of this in mind, it is important for the landlord and the tenant to keep evidence of their compliance with any break conditions, consider the consequences of service of any break notice and seek legal advice in good time before exercising a break clause.
If you would like advice on break clauses or any other issues relating to commercial leases, please contact Louise White t: 0118 957 3425 e: firstname.lastname@example.org