How to correctly exercise a break notice in your commercial lease
Commercial landlord and tenant relationships are under strain, with many office tenants looking to reduce office space and with many retail tenants moving online and reducing the number of stores from which they operate. It will come as no surprise that an increasing number of commercial tenants are looking to exercise their break right within the lease.
How should a lease break notice be exercised in order for it to be effective?
It is not as straightforward as one might expect and there are plenty of traps for tenants to fall into. Often, it is only after the event when a tenant realises that the one line email which it sent to the landlord’s managing agent does not constitute valid written notice under their lease. By that stage it could be too late resulting in potentially disastrous consequences for the tenant.
Factors to consider in advance of serving a break notice in a lease
If you are considering serving a break notice in a lease, it is crucial to check the terms of your lease in order to determine the following:
- Is it a rolling break or a one off break?
- How much notice needs to be given to your landlord?
- Who is the landlord? Has there been a change in ownership and has the change been registered at HM Land Registry?
- Is the landlord based in the UK or aboard?
- How does notice need to be given? Are there specific service provisions under the lease? Is there a deemed service provision and do you require proof of posting?
- Who is “the Tenant”? Are there joint tenants?
Break Clause Conditions
A further key consideration is whether there are conditions which need to be complied with in order to validly exercise the break clause in a commercial lease.
Most commonly, a break clause is conditional upon the tenant giving vacant possession on the break date. There is a wealth of case law in this area but three key points are to ensure that:
- the landlord is able to assume and enjoy immediate and exclusive possession on the break date – it may sound simple, but make sure that all sets of keys are returned;
- there are no people on the premises at the break date (this includes trespassers, subtenants and any workmen carrying out repairs); and
- the premises are empty of chattels which substantially prevent or interfere with the enjoyment of the landlord’s right to possession.
Another common pre condition is payment of all rent, service charge and other sums up to the break date. You do not want to risk invalidating a break (especially if it is a one off break date) so it is advisable to check:
- that all payments have been made on time;
- whether there is any interest or VAT outstanding;
- whether the break date falls in the middle of a quarter. If so, is there an apportionment clause? If not, you will need to pay the full quarter’s rent;
- whether there a break clause penalty which needs to be paid.
What if a tenant changes its mind after serving the break in a commercial lease?
A break notice cannot be unilaterally withdrawn once it has been exercised and therefore if a tenant changes its mind and wishes the lease to continue, it may choose to deliberately fail to fulfil a condition. However, one point to bear in mind is that even if a tenant deliberately fails to fulfil a condition, a landlord retains its right to waive the break clause conditions. It is therefore crucial to consider matters carefully before exercising your break option.
The break notice minefield – how to serve a break notice right first time
It is always important to do things right first time but this is especially true when considering exercising a break clause in a lease as break notices are strictly construed by the courts. We often find that our clients come to us after the event and that we are asked to unknot problems. Often it is too late and money and time is lost.
We encourage all of our clients to instruct us before serving a break notice so that we can provide simple and cost-effective advice that puts you in the position you want to be in.