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Exercising Break Clauses in Commercial Leases

In today’s difficult economic climate, tenants who have negotiated a break clause in their commercial lease may be alarmed to find out just how difficult it can be to successfully exercise it.

In essence, a break clause allows either the Tenant or the Landlord to terminate the Lease early. Although this sounds fairly simple, in practice, a Tenant wishing to exercise the break may find it anything but straightforward. The right to exercise a break is usually conditional upon certain conditions being fulfilled, such as rents being paid up to the break date, the need to give vacant possession and to comply with other general tenant obligations in the lease.

Vacant possession is generally considered to mean that;

(a) The property needs to be empty of people;
(b) The Landlord must be able to take immediate and exclusive possession, occupation and control of the property and
(c) The property must be empty of chattels that might otherwise prevent or interfere with the landlord’s right to possession of a substantial part of the property.

A recent case on this issue was Riverside Park Ltd v NHS Property Services Ltd (2016) which focused on whether the Tenant’s failure to remove partitioning at the premises meant the break was ineffective.

When the Lease was granted, the premises were open plan. A licence for alterations was entered into by the Landlord authorising the Tenant to install a large amount of partitioning. The Tenant sought to exercise the break clause in the lease but failed to remove the partitioning by the break date.

The Landlord argued that the break notice was ineffective as the presence of the partitioning meant that the Tenant had failed to provide “vacant possession”. The Tenant on the other hand contended that the partitioning was now a fixture and thus formed part of the premises (i.e that they were not chattels which would be an impediment to giving vacant possession).

It was decided that the partitioning was demountable as it was constructed on top of a raised floor and reached the underside of the suspended ceiling and was only fixed by screw fixing and not affixed to the structure. It was therefore held that the partitioning did indeed prevent and interfere with the right of possession, so the tenant could not break the lease and had to remain in occupation paying the rent for the rest of the lease term.

Thus Tenants who wish to exercise their break clause must check and consider any conditions in good time before any notice to exercise the break has to be served and to consider what work they may need to do to secure an effective break… If in doubt, seek our advice in good time.

For more information about Commercial Property contact Tim Read on

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