Commercial lease break notices: tips and pitfalls

A break clause is a provision in a commercial lease that allows either the landlord or the tenant to terminate the lease early – usually at a specific interval, for example, after five years or every five years. There are usually specific requirements that must be met to successfully exercise the break, which usually include serving a break notice.

What are break notices?

Break notices can be complex and questions over whether a break option has been validly exercised can give rise to formal disputes, which if contested in court, can lead to long running and costly disputes. Getting it wrong can have significant financial consequences for both parties. For landlords, they may become liable for the payment of any rent to a head landlord, borrowings and utilities. For tenants, they may be liable to pay a sum equivalent to the financial obligations arising from occupation of the property in the period from the purported break to the end of the lease.

From recent experience, we consider the tips and pitfalls in exercising break options.

1. The lease

The first step is to consider the terms of the lease to determine whether there is a break option and if so, the steps that must be taken to exercise the break, including when it can be exercised. It is common for a formal break notice to be required, and in the case of a tenant’s break, for a break payment to be made. The lease will also specify any other requirements that must be met for the break to be valid, which may include payment of rent and other sums due under the lease up to a particular date.

It is important to obtain legal advice well in advance of any deadlines to ensure there is sufficient time to consider what is required and by when.

2. Complying with the break clause: the break date

The lease may specify the break date or it may be calculated with reference to a date of entry or a period of notice. It is important to determine the break date as not only is that the date that you intend the lease to terminate, it will also likely be used to determine when the formal break notice is required to be served and when any break payments are required to be made.

3. The notice

In order to exercise the break, a formal break notice will be required to be served on the other party. The lease will usually specify the timescales for service of break notices.

Leases usually contain a “notices” clause, which is a clause that sets out how formal notices under the lease are to be given, to whom they are to be given, and any required content.

Failure to serve the break notice correctly may mean that the break has not been validly exercised.

4. Payments

Break payments are commonly required in order to exercise a break option. It is often the case that the break payment is to be made at a time after the service of the break notice. Late payment or incomplete payment may be fatal to the proper exercise of the break.

The terms of the lease should be checked carefully, for example: is the break payment subject to VAT?; if VAT is payable, is a VAT invoice  required from the landlord?; and does the rent (and potentially also, service charge and insurance) required to be paid?

5. Leaving the property

Tenants

In advance of the break date, tenants should consider the repairing and re-instatement provisions of the lease to ensure that the property is left in the condition required by the lease. A failure by a tenant to leave the property in the condition required by the lease may give rise to a separate dispute in relation to dilapidations.

Landlords

Whilst a landlord has no duty to inform a tenant that they consider the exercise of a break to be invalid, landlords (and those acting on their behalf) should be careful not to give conflicting messages to the tenant.

How we can help 

Getting the exercise of a break notice right is business critical. If you have any questions in relation to your commercial lease or break provisions, our market leading real estate litigation team can provide practical advice to ensure your business aims are met.

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